The arrival of aggressive developers from the PRC

SAR's residential landscape 

Mainland China’s finance industry has made its presence felt in Hong Kong for a decade now, and it is having a noticeable impact on the commercial sector — chiefly that it is singlehandedly propping office rents up and keeping vacancy rates down. 

Prime Central addresses are no longer dominated by traditional MNCs, who are increasingly opting for cost-effective premises at Island East and Kowloon East or for one-shot solutions like serviced offices and co-working spaces. PRC-based banks and insurance companies are buying office towers en bloc, and developers are getting in on the action too, with more and more making purchases at land sales. Like the office sector, Hong Kong’s residential future could be in for a drastic change.

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Despite capital controls levied by Beijing in late 2016, and the resulting 84.3% drop in outbound property investment in January 2017 over the previous year, investment by PRC firms continues in Hong Kong. According to April data from Colliers International, Chinese ODI in Hong Kong was valued at just over $36 billion in the first quarter of 2017, and Hong Kong is second only to New York for investors. Landmark office towers sit at the top of the asset list. CBRE research states Chinese ODI in Hong Kong’s office sector from 2015 to present totalled $43 billion, accounting for 27% of total volumes. During that same period, developers spent $64.5 billion on land.

New players, new rules

Recently, PRC developers have expressed an appetite for Hong Kong residential land, overpaying considerably for government-tendered land in 2015. “You could say they are aggressive but not necessarily ‘overpaying’, as investors have their own assessments on costs, margins and views on market outlook,” says Marcos Chan, head of research for CBRE Hong Kong, Southern China and Taiwan. Colliers’ director of research, Daniel Shih, agrees. “I don’t know that they’re overpaying, but they’re being more aggressive, because they’re establishing their names in Hong Kong.
It’s part of a strategy, to let everyone know who they are, and there’s a benefit to having a project in Hong Kong. It will sell more houses back in China; it marks them as a global player.”

February Research by JLL stated that Hong Kong’s seven major developers — Sun Hung Kai Properties, Cheung Kong Property, Henderson Land, Nan Fung Group, New World Development, Sino Land and Wheelock Properties — saw their representation in land sales shrink from 45% in 2012 to 22% in 2016. That same year, 30% of the year’s sales went to PRC developers representing 40% of the money spent. Of this year’s three sales so far, all have gone to PRC firms, and total value already exceeds 2016’s. Recent entries to the Hong Kong market are Vanke (which paid $1.31 billion for Sham Shui Po site), China Overseas ($2.13 billion in Tai Po), Goldin Financial Holdings ($6.38 billion in Ho Man Tin) and Logan Property Holdings and KWG Property Holdings, which paid a record $16.86 billion for a site in Ap Lei Chau in February.

Expensive land means expensive flats, something the city is already wrestling with; Colliers predicts mass residential prices will climb 8% in 2017. Early word is that any flats on the Ap Lei Chau site could be priced at a minimum of $32,000 per square foot. Homebuyers may very well face crushing prices, but it’s not even a hole in the ground yet. “There’s no guarantee that developers who paid premium prices for land will be able to sell at prices with positive margins, depending on economic and property market conditions at the time they launch the flats for sale,” says CBRE’s Chan. “There’s usually a two- to three-year lag period between the time developers buy a piece of land from the government and when they launch for pre-sale.
There are lots of economic and policy uncertainties in between that can affect the ultimate sales prices and responses.”

“At the end of the day they have to rely on market sentiment at the time of sale… If there is going to be a turnaround because of changing sentiment they’ll have to follow it rather than artificially jack up the prices in order to make a profit,” notes Shih.

SAR's residential landscape

The trickle down

So where does that leave the local players? For starters, they will have to come up with new strategies to compete with the changing landscape, among them converting agricultural land banks to residential land, moving outside the core urban areas for small and independent developers, focusing on redevelopment, and partnering with cash-rich PRC operators with little local experience. Converting agricultural land will be crucial according to Colliers, and will potentially put new homes even deeper into the New Territories. Colliers estimates Henderson, Sung Hung Kai, New World and Cheung Kong alone hold a combined 106 million square feet of banked land (in a so-called “land shortage” no less).

On top of dwindling purchasing power, JLL’s big seven also missed out on several MTRC and URA bids, putting them even further on the defensive. “The tender of MTRC projects, usually with a larger development scale, has also seen their level of influence decrease. Looking ahead, their contribution to future housing supply is expected to fall,” theorised Henry Mok, regional director of capital markets at JLL. The majors are making feeble attempts at competitive bids but remain unwilling to take the extra step to secure new land. “Given difficulties in replenishing their land bank, major developers may turn to selling the new flats at higher prices, at the expense of sales volume. We expect asking prices of new projects to remain firm.”

Mainland developers, and the disruption they pose for Hong Kong’s development establishment will be the new norm for the foreseeable future. Homegrown players, “Might have to raise the bar and offer more competitive bids for some prime sites in the pipeline,” finishes Chan. “I don't believe they see Hong Kong as losing value, just becoming an even more competitive market.” Whether that competition is a boon for home-seekers only time will tell.

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