No relief for Hong Kong tycoons riled by high China land bids

Bloomberg

Shum Chiu Hung, chairman of Chinese developer Times Property Holdings Ltd., has advice for those dismayed at record land bids in Hong Kong by mainland firms: “Get used to it.”
Chinese developers have dominated Hong Kong’s land sales this year, splurging more than $2.9 billion to win all three residential plots tendered, including a record sum for a waterfront site. That adds to a spate of acquisitions since the beginning of 2016, with Chinese buyers accounting for 53 percent of the $12.2 billion in Hong Kong’s government land sales in that period, according to data compiled by Bloomberg based on official numbers.
Some of Hong Kong’s property billionaires have singled out the phenomenon of rising land prices in seeming bafflement. Sun Hung Kai Properties Ltd.’s Chairman Raymond Kwok alluded to “crazy bids” by Chinese entrants in the company’s earnings briefing last week. Property tycoon Li Ka-shing has said that the price of “flour,” or land, now exceeds the cost of “bread,” or apartments, while fellow octogenarian Lui Che-Woo said he was having trouble reading the property market amid skyrocketing land prices.
The buying spree by mainland developers could also prove a fresh headache for Hong Kong’s leader-
ship, which has tried in vain to rein in home prices in the world’s costliest property market.
Apartment buyers tend to view aggressive land bids as a sign that prices have further to climb, helping to drive speculative demand, according to analysts. CIMB Securities Ltd. estimates that rising land prices will lead to a 10 percent increase in the cost of finished homes by 2019.

HNA’S FORAY
Units of conglomerate HNA Group Co., led by Chinese aviation tycoon Chen Feng, bought three out of four plots in the former Kai Tak airport area in Kowloon district since late last year. In its very first foray into Hong Kong in November, HNA beat 19 bidders to set a record with a HK$8.84 billion ($1.1 billion) offer before winning two other bids in adjacent sites.
HNA’s record was topped last month, when Logan Property Holdings Co. and KWG Property Holdings Ltd. agreed to pay HK$16.9 billion for a site in Ap Lei Chau — linked to the southern part of Hong Kong island — a sum that was 58 percent more than the price expected by analysts. A property unit of Chinese insurer Ping An Insurance (Group) Co., also last month, was part of a group that won a site tendered by the city’s railway operator MTR Corp. for an undisclosed sum.
Times Property’s Shum, who hasn’t yet invested in Hong Kong but says he is paying close attention to the market, sees the trend intensifying as Chinese developers look for new areas of growth outside the mainland, where land prices are also climbing out of reach. “The share that Chinese developers have in Hong Kong’s land market will get just bigger and bigger,” he said.

RAPID GROWTH
Chinese investors aren’t completely new to Hong Kong’s property market. Developers such as China Overseas Land & Investment Ltd. were among the early movers into Hong Kong, with land purchases dating as far back as the late 1990s. Still, their collective share has grown rapidly in recent years, from 1 percent of all land sales in 2011, according to data from CIMB.
For Hong Kong’s biggest developers, including Cheung Kong Property Holdings Ltd., Sun Hung Kai and Wheelock & Co., the forays by mainland developers have intensified competition for a limited supply of land. Many are showing restraint, with Sun Hung Kai’s Kwok saying on Feb. 28 that the company will be prudent in bidding land and will instead seek alternatives such as converting farmland for residential use.

MANY MOTIVATIONS
Reasons for the growing interest by Chinese developers abound. Land prices in China surged 72 percent in 2016 due to thinner land supply and red-hot competition, said David Hong, head of research at China Real Estate Information Corp. Meanwhile, regulators have vowed to crack down on rising home prices as part of a goal to deflate asset bubbles and market risks.
Hong Kong’s currency, pegged to the US dollar, also makes it an attractive destination for Chinese developers, who are seeking to insulate themselves from a weakening yuan, said CIMB’s Raymond Cheng.
Derek Lee, director of investor relations at Shenzhen-based Logan, one of the winning bidders for the Ap Lei Chau site in Hong Kong, said the overall tax rate in Hong Kong is lower than it is on the mainland, making profit margins higher for some projects.
Even if prices stay flat between now and when the developer plans to start selling units about three years from now, Logan would still make money, Lee said in an interview. Plus, investing in Hong Kong helps Logan diversify and boost its brand, he said.
Still, for China’s growing army of developers seeking to expand in Hong Kong, it’s not all rosy. JPMorgan Chase & Co.’s Ryan Li cut the rating and price target of KWG after its record bid. Cash recovery for developers takes an average 30 to 36 months in Hong Kong, three times as much time as in China, JPMorgan analysts led by Li wrote in a Feb. 28 note. In addition, Hong Kong’s property market is sensitive to the rate hike cycle in the US, a factor not seen in the mainland.