Hong Kong Land Auction Shows Developers Confident as Demand Is Sustained

Hong Kong’s first land auction since November raised close to the top estimate of analysts, signaling developers remain confident the market will withstand government efforts to cool prices.

Nan Fung Development Ltd. and Wing Tai Properties Ltd. (369) paid HK$1.525 billion ($196 million) for the plot in the Hung Hom district, close to the site of the city’s former airport. Estimates ranged from HK$1.07 billion to HK$1.53 billion, according to five surveyors and analysts surveyed by Bloomberg.

Housing prices in the city, ranked the world’s most expensive place to buy a home by Savills Plc (SVS), have gained more than 65 percent in the past two years on record-low mortgage rates and an influx of buyers from China. The government in November increased property transaction taxes and pledged to boost land supply amid public protest that housing prices are becoming unaffordable and as the central bank warned about the risk of a “credit-fueled property bubble.”

“It reflects developers are confident about the underlying health of the property market,” said Yu Kam-hung, senior managing director of valuation and advisory services for Greater China at CB Richard Ellis Group Inc. “It shows that despite government efforts to increase land supply, buyers’ sentiment will continue to be supported by the threat of inflation.”

The price paid is equivalent to gross buildable area of HK$9,934 a square foot, according to Centaline Property Agency Ltd. The estimated selling price for the units on the site is HK$12,934 per square foot, according Centaline.

‘Being Positive’

Closely held Nan Fung will develop the site in a 50-50 joint venture, Managing Director Donald Choi said after the auction. The project will cost HK$500 million to HK$600 million to build, he added, declining to give an estimate for the selling price. The developers will build more than 100 three to four-bedroom luxury apartments, Choi said.

“The bidders are being positive in the way that they are bidding; they are not holding back,” Lands Department Deputy Director Graham Martin Ross said after the auction. “It shows strong interest for this type of property.”

Home prices in Hong Kong rose 0.6 percent in the week ended April 17, halting a three-week, 1.6 percent-slide since mid- March when some of the city’s biggest lenders including BOC Hong Kong (Holdings) Ltd. raised mortgage terms based on the Hong Kong Interbank Offered Rate, according to an index compiled by Centaline. Prices have risen about 10 percent since November.

‘Best Alternative’

Hong Kong’s consumer price index climbed 3.97 percent year- on-year in the first three months of 2011, according to data compiled by Bloomberg. Inflation and the signs of a property bubble are among the biggest risks for the economy, the Hong Kong Monetary Authority said in its annual report released last week. Hong Kong’s currency peg to the dollar prevents the city’s de-facto central bank from raising interest rates.

“Nobody knows when U.S. is going to raise interest rates and until then people will continue to be concerned about where to put their money other than bank deposits,” said CB Richard Ellis’s Yu. “Property is still the best alternative to many people here.”

The government will sell a total of nine sites in the second quarter, generating 2,650 apartments, and is considering announcing its land sale schedule at the beginning of each quarter, Financial Secretary John Tsang said earlier this month.

Hong Kong may auction as many as 52 plots of land this year, Tsang said in his Feb. 23 budget speech. The land could yield 16,000 units, almost 80 percent more than from land sold last year.

Land Sales

Most government land sales in recent years have been done through a so-called application system where developers’ offers to buy the sites trigger the auction. That system was put in place in 2002 to support falling home prices amid the Asian financial crisis that started in 1997. Government-initiated land auctions were partially resumed last year.

The site on Ko Shan Road sold yesterday has buildable area of 14,262 square meters (153,514 square feet), according to the Development Bureau’s website. It was the first land sold in Hung Hom since August, when Cheung Kong (Holdings) Ltd., controlled by Hong Kong’s richest man Li Ka-shing, paid a higher-than- estimated HK$9,600 per square foot for a 366,000-square-foot site.

Prices at nearby Whampoa Garden, an 88-tower, 10,500-unit project built by Cheung Kong in 1991, currently stand at about HK$7,500 a square foot, according to property consultant Knight Frank LLP.

“This is reasonable and shows most developers believe the market has already digested the latest measures to curb prices and are confident prices will remain solid,” James Cheung, a director at the surveyor unit of Centaline, the island’s biggest closely held realtor, said after the auction.

Nan Fung joined Wharf Holdings Ltd. (4) to bid HK$10.4 billion for a site on Mt. Nicholson Road in the Peak area on Hong Kong Island last July. The developer, founded by billionaire Chen Din Hwa, bought a site in the Tung Chung area on Lantau Island near the city’s international airport for HK$3.42 billion at a government auction in May last year.

To contact the reporter responsible for this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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