Hong Kong’s home builders are bidding cautiously on land to develop, wary of shrinking profit margins as the territory’s new leader pushes for more affordable housing in the world’s most expensive residential real-estate market.
Property developer Cheung Kong Holdings (長江實業), founded by Asia’s richest man, Li Ka-shing (李嘉誠), bought only one new plot in the territory in the first half of this year, an unusually quiet span for Asia’s No. 2 developer by market value.
On Aug. 10, Cheung Kong spent HK$9.6 billion (US$1.24 billion) on a huge site above a subway station, but on condition set by subway operator MTR Corp that half of the 2,384 apartments would be small, affordable units of not more than apartments of not more than 50.2m2. Such units tend to generate slimmer profit margins.
“We were in a situation where they [developers] were making extraordinary, if not obscene, profits,” said Nicholas Brooke, chairman of the real-estate consulting company Professional Property Services. “Now we’ll return to where markets are a little bit more acceptable.”
The property brokerage Savills last year rated Hong Kong’s residential real estate the most expensive worldwide, topping other financial centers such as London and New York.
New Hong Kong Chief Executive Leung Chun-ying (梁振英), a former property surveyor who was elected without the backing of the territory’s powerful real estate tycoons, unveiled his housing policy in a surprise address on Thursday.
Leung introduced 10 measures aimed at cooling the property market and promised 65,000 new private apartments and 75,000 government-rental apartments.
The greater supply will likely eat into developers’ margins.
Cheung Kong earned HK$15.5 billion in the first half of this year, a huge sum, but down 54 percent from the same period a year earlier. Its gross margin was 44 percent, according to Thomson Reuters data.
Rival Sun Hung Kai Property (新鴻基地產), Asia’s biggest property company, generated net income of HK$21.1 billion for the six months ended Dec. 31, with a gross margin of 39 percent. Results for the June period are due later this month.
“Developers have already signaled that they believe prices will come down given the way they are bidding on land,” said Andrew Lawrence, Hong Kong property analyst with Barclays Capital. “Margins of 35 to 40 percent may not be sustainable.”
As of early last month, developers had spent only HK$17.8 billion on land since the start of the new tax year in March, although that does not include Cheung Kong’s latest buy. If that pace is sustained, spending would fall short of the prior tax year’s tally of HK$67 billion.
Tenders on the two MTR sites — including the one eventually won by Cheung Kong — were initially withdrawn when developers failed to match the price that the MTR was seeking for development above its train stations. Other land sales have come in toward the bottom end of surveyor expectations or have also been withdrawn.
Hong Kong home prices are up 12.3 percent so far this year, according to data from Centaline Property Agency (中原地產), and have shot up 89 percent since the end of 2008, making it hard for lower-income households to get on the property ladder.
However, Leung faces a difficult task, with no control over a currency pegged to the US dollar that has brought super-low mortgage rates of just more than 2 percent.