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The Vanke redevelopment site at Liberty Avenue in Ho Man Tin. Photo: Jonathan Wong

Old is gold as Chinese firms target Hong Kong buildings older than 50 years for redevelopment in bid to cut costs, boost margins

  • Projects on land acquired through public tender can often cost about HK$10 billion
  • Vanke’s gross profit from Liberty Avenue project could be as much as 38.5 per cent

Mainland Chinese developers are increasingly using compulsory auctions to acquire land cheaply in Hong Kong.

Land acquired through this route is cheaper than plots bought through government tender. “The land offered [for tender] by the government has a high value, in several billions. A project can often cost about HK$10 billion, taking construction costs into account,” said Charles Chan, managing director of valuation and professional services at Savills. “In contrast, the development cost of projects [acquired through] compulsory auction is much lower.”

Esther Liu, analyst at S&P Global Ratings, said alternative land acquisition approaches could lead to potentially higher margins than buying land through public tender, but the development cycle in these cases could further lengthen, given their complexity.

To facilitate urban renewal, majority owners of a lot of land who satisfy requirements under the Land (Compulsory Sale for Redevelopment) Ordinance can apply to the Lands Tribunal for an order for compulsory sale. In practice, an agent will help to buy from individual owners. Once they have 90 per cent, or 80 per cent for buildings more than 50 years old, the buyer, usually a developer, can make an application to the Lands Tribunal for an order to sell the whole building for the purpose of redevelopment even if the rest of the owners do not want it.

The lower costs associated with compulsory auctions have attracted the attention of mainland Chinese developers. Liberty Avenue in the upmarket Ho Man Tin neighbourhood presents an idea of how urban redevelopment is reshaping a city full of buildings that are more than 50 years old, as these developers seek to reduce their land costs.

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In this case, the buyer is Vanke Property (Hong Kong), and the auctioneer is Savills. Vanke won the rights for 13 and 13A Liberty Avenue, a nine-storey building an eight-minute walk from the Mong Kok station developed in 1964, through compulsory auction for HK$249.1 million (US$31.8 million) on April 23.

The average cost of acquiring the Liberty Avenue building was HK$11,320 per square foot based on a gross floor area of 22,005 sq ft.

The average price per square foot of Kadoorie Lookout, a redevelopment project three minutes’ walk away by Tai Hung Fai Enterprise, completed five years ago, was HK$22,605 in March, according to Midland Realty. If the Liberty Avenue project can be sold at this price level, Vanke’s gross profit could be up to 38.5 per cent, taking construction cost of HK$5,000 per square foot into account.

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In contrast, government land sold for HK$13,701 per square foot in Kai Tak in late March through tender. Recent transactions in Kai Tak have come in at HK$20,047 per square foot, according to Centaline Property Agency. If sold at this level, Vanke’s gross profit margin is only at 7.2 per cent, taking construction cost at HK$5,000 per square foot.

So Vanke saved about HK$2,382 per square foot.

Vanke has also applied for the compulsory auction of buildings at 9 to 11A Liberty Avenue. If the two sites are developed together, the total gross floor can surge to about 651,000 sq ft.

The company redeveloped a site in Wan Chai’s Lun Fat Street it bought for HK$860 million from local developer Soundwill Holdings in 2014 into the 105-unit serviced apartment The Luna.

The rent per square foot at The Luna is above HK$100. This is at least two times the rents of between HK$40 and 50 per square foot at buildings more than 30 years old nearby, according to Tommy Cheung, regional sales director at Centaline Property Agency.

Despite the high rent, The Luna has achieved a 90 per cent occupancy rate and more than HK$3 million a month in rental income.

“Many of our tenants are executives in finance, law and other professions,” said Quincy Chow, director of Vanke’s sales, marketing and customer relations department.

Vanke is not the only mainland developer buying old buildings for redevelopment. Agile Group also applied for the compulsory auction of 2 to 8 Mount Parker Road in Quarry Bay, two six-storey, 56-year-old buildings.

S&P’s Liu, however, said: “With a lack of track record, it’s still early to say whether mainland developers can succeed.” She added that the scale will remain small and these companies are likely to take a measured stance on expansion in Hong Kong in the longer term.



This article appeared in the South China Morning Post print edition as: Mainland firms turning to redevelopment auctions to boost margins, cut costs