Weekend Property

Significant market: mainland property developers ‘have been keeping a close eye’ on Hong Kong and are stepping up investments

Chinese investors have been aggressively snapping up residential sites from government land auctions, hedging against further yuan depreciation risks and demonstrating their ability to expand globally

PUBLISHED : Friday, 19 August, 2016, 1:47pm
UPDATED : Friday, 19 August, 2016, 3:32pm

Why are mainland developers continuing to make forays into the Hong Kong property market, where buyers are treading cautiously and prices remain subdued?

Earlier this month, eyebrows were raised when mainland-based property developer Minmetals Land outbid 13 others at a land auction to purchase a site in Yau Tong for HK$4 billion.

While it came as a surprise, it also appears to shed some light on why mainland players are becoming aggressive in their forays into Hong Kong and overseas real estate sectors.

Mainland companies and developers have so far poured about HK$60 billion on office buildings and residential land in the city, partly driven by a fear of further depreciation in the yuan, according to media reports.

Market observers also point out that Hong Kong is viewed by mainland developers as one of China’s first-tier cities, despite being a special administrative region. Having a presence here is an effective way to solidify their brand and demonstrate their ability to expand globally.

Since 2014, mainland developers have snapped up a total of 12 residential sites for approximately HK$32.4 billion from government land auctions. And, since 2011, they have purchased at least seven sites valued at approximately HK$4.5 billion in the private land market, according to records compiled by property consultant DTZ/Cushman & Wakefield.

Mainland developers are not only active in the private land market, their presence is also increasingly felt in government land sales, says Kenneth Yip, a director of investment and advisory services at DTZ/Cushman & Wakefield.

“A lot of mainland developers have been keeping a close eye on the Hong Kong housing market. To them, not only is Hong Kong a first-tier city, it’s also an international financial centre, a significant market that they don’t want to miss [out on].”

Apart from Hong Kong’s attractive features, there are other reasons that are pushing them to diversify from the mainland market. Some cities, including Shanghai, have introduced, and hinted at, further cooling measures to rein in an overheating market.

“Therefore, it makes sense for them to tap the Hong Kong market while seeking development opportunities abroad. After all, Hong Kong has long served as a window to the international market for mainland businesses,” Yip says.

To them [mainland developers], Hong Kong not only is a first-tier city, it’s also an international financial centre
Kenneth Yip, director of investment and advisory services, DTZ/Cushman & Wakefield

The Yau Tong site bought by Minmetals has a maximum gross floor area of approximately 566,700 sq ft, which could be turned into about 790 units. Another Tai Po site purchased by China Overseas for HK$2.13 billion in February comprises 566,700 sq ft of gross floor area, enough for 1,500 units.

Last September, Shimao Property acquired a prime residential site with 632,385 sq ft of gross floor area in Kowloon Tong for HK$7.02 billion, outbidding six others, at a government land auction.

“In the private land market, they appear to be more interested in prime sites that are close to the [central business district],” Yip says.

For example, MCC Land, the real estate arm of China’s MCC Group, is rumoured to have bought a site on Mosque Street, Sheung Wan, for HK$820 million in June. China Vanke has reportedly bought another site on Luen Fat Street, Wan Chai for HK$860 million.

It is evident that they have a positive take on Hong Kong’s medium-term market outlook, according to Yip. It is likely that they want to take advantage of low land prices, but expect policy easing and market recovery after a couple of years.

In addition to potential profits, Raymond Cheng, director of Hong Kong and China property equity research at CIMB Securities, says undertaking property developments in Hong Kong is also an important brand-building strategy for mainland players.

While some, such as China Vanke, prefer teaming up with local partners for their overseas projects, others believe they are ready to go solo for large-scale projects with their local team, he says.

One key factor is the expectations of a weakening yuan against the US dollar. In the past year, the yuan has depreciated by 8.9 per cent since China’s exchange rate reform started in August last year.

“In some sense, investing in Hong Kong and overseas projects is a way to hedge against currency risks,” Cheng says. Another reason, he says, is the availability of cheaper financing in Hong Kong, where they could borrow at rates as low as 2 to 3 per cent per annum. That compares with lending rates of 5 to 7 per cent per annum on the mainland.