China Beckons to Hong Kong Builders as Local Firms Squeezed

A view of Beijing apartments on April 10, 2011. Photo by Lintao Zhang/Getty Images Close

A view of Beijing apartments on April 10, 2011. Photo by Lintao Zhang/Getty Images

Close
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A view of Beijing apartments on April 10, 2011. Photo by Lintao Zhang/Getty Images

Hong Kong developers are poised to snap up land in China at a time when their mainland rivals’ finances are being sapped by government property curbs.

Builders including Sun Hung Kai Properties Ltd. (16) and Cheung Kong (Holdings) Ltd. took in HK$66 billion ($8.47 billion) from new apartment sales in the six months ended June, a first-half record, according to Centaline Property Agency Ltd. Chinese developers face a shortage of credit and higher interest rates, prompting Standard & Poor’s to cut its outlook on the sector.

“Hong Kong developers should have an advantage in acquiring land while their Chinese counterparts are less aggressive,” said Jack Ye, a Shanghai-based director of investment at property broker Cushman & Wakefield Inc. “Chinese developers have turned cautious on land purchases as the government measures tightened their liquidity.”

Swire Pacific Ltd. (19) on July 29 sold a mall in Hong Kong for $2.4 billion, giving funds Core-Pacific Yamaichi International Ltd. analysts said it will deploy in China. Hang Lung Properties Ltd. (101) the same day said it has built up Chinese currency holdings of 20 billion yuan ($3.1 billion) for its projects in the country. Cheung Kong, controlled by Hong Kong’s richest man Li Ka-shing, is scheduled to report interim earnings tomorrow, with analysts expecting a nearly threefold increase in net profit, helped by increased sales in Hong Kong.

Cash-Rich

Hong Kong’s developers are betting there’s more upside in other Chinese cities as curbs at home stem a 70 percent surge in housing prices since the start of 2009. Average home prices rose 0.2 percent in China in July from the previous month, with prices increasing in 66 out of the 100 cities surveyed by SouFun Holding Ltd.

Builders in Hong Kong are among the world’s most cash-rich after a two-and-a-half-year property boom in the city of 7.1 million people. The top 51 developers in the city have an average debt-to-common-equity ratio of 47 percent, compared to the average 126 percent of their counterparts in other parts of China, according to data compiled by Bloomberg.

Even the most indebted Hong Kong developer in the Hang Seng Property Index, Henderson Land Development Co., is better off than the least indebted among China’s 10 biggest developers, Soho China Ltd. Henderson Land’s ratio at the end of 2010 was 34 percent, while Soho’s was 55 percent, Bloomberg data shows.

Higher Interest Rates

“Hong Kong developers have enough cash for countercyclical investments in other Chinese cities,” said Dundas Deng, a Hong Kong-based analyst at Guotai Junan Ltd. “Hong Kong is facing a serious property bubble caused by its historically low interest rates. Hong Kong developers will need the mainland market to boost earnings, especially when interest rates rise at home.”

Home prices in the city of 7.1 million may drop 30 percent by 2013, Barclays Capital said in an April 4 report, as borrowing costs rise.

Interest rates in Hong Kong normally follow the rates set by the U.S. Federal Reserve as the city’s currency is pegged to the U.S. dollar. That link has been weakened this year, with local banks increasing mortgage rates as depositors shift to yuan over Hong Kong dollars and Chinese companies seek loans in the city due to the tightening policy in China.

Sales Stall

Concern the Chinese economy may be overheating led the People’s Bank of China to raise interest rates five times and the reserve-requirement ratio 12 times since the start of 2010 to tame inflation. Some cities have imposed property taxes, down payments have been increased, and more second- and third-tier cities announced measures to damp housing prices.

China failed to sell 353 parcels of land, including 163 pieces for residential development, at auction in the first seven months of this year, 242 percent more than the same period a year ago, the Beijing Times reported today, citing Beijing Homelink Real Estate Co.

“The government’s effort to curb the market creates a lot of uncertainties and they sure have impact on developers, be they local or outsiders,” said Eddie Hui, a professor in the Department of Building and Real Estate at the Hong Kong Polytechnic University. “So if you time the market wrong, it could have disastrous consequences.”

Chinese developers’ outlook was cut to “negative” from “stable” by Standard & Poor’s on June 15. The ratings company said tighter credit and further government curbs may lead to rating downgrades in the next year.

Opportunity

“When the local people have financial difficulties, that’s our opportunity,” Hang Lung’s Chairman Ronnie Chan said in a June 30 Bloomberg Television interview. “For the most part, the Hong Kong players are financially strong. Hopefully it’ll give us the chance to step in.”

Hang Lung, which is building shopping malls in five Chinese cities, last week said full-year profit excluding gains from revaluations fell 59 percent on fewer home sales in Hong Kong. It last bought land in China in May 2009, when it paid 415 million yuan for a site in Wuxi city.

Hang Lung has a list of cities that it is focusing on and looking carefully for potential land purchases, Chan said in a July 29 briefing for the company’s full-year earnings.

“We’ll probably only start acting when there’s a pullback in prices,” Chan said at the briefing. “At the moment, some of the lands we’re interested in are too expensive. This is keeping us from buying anything.”

Accelerating Sales

Builders in Hong Kong are accelerating apartment sales amid signs that local government curbs, including higher down-payment requirements and increased land supply, are damping demand. The number of housing transactions in the city fell for a seventh straight month in July, to the lowest since February 2009.

Sun Hung Kai, the world’s biggest developer by value, has sold over 600 of the apartments at its Imperial Cullinan project in Hong Kong’s West Kowloon district, taking in about HK$13 billion in revenue since sales began on June 29, the company said. It added 3 million square feet to its China landbank in the second half of 2010, bringing the total to 82 million square feet, according to its fiscal interim report.

Cheung Kong in July raised its 2011 sales target for Hong Kong to HK$25 billion from an earlier HK$20 billion. The city’s second-biggest builder led developers’ sales in the first half with HK$14.5 billion, according to Centaline, the city’s biggest closely held real estate agency. Henderson Land came second, followed by Sun Hung Kai.

China Spending

Cheung Kong has almost 41 percent of its gross assets in Chinese cities outside of Hong Kong, the highest proportion among the city’s 10 biggest builders. Along with partners, it added 1.17 million square meters (12.6 million square feet) to its landbank in China in the second half of last year, its annual report showed.

“I won’t be surprised if the likes of Sun Hung Kai and Cheung Kong use some of the proceeds from apartment sales in Hong Kong to replenish their land bank, both in China and the city,” said Katie Chan, a Hong Kong-based analyst at Haitong Securities Ltd. “There’re more land scheduled to be sold by the Hong Kong government this year, but that doesn’t mean they won’t look beyond the city.”

Swire Pacific, the biggest landlord in the city’s Island East district, last week agreed to sell the Festival Walk shopping center for HK$18.8 billion to a unit of Singapore’s Temasek Holdings Pte in the biggest property transaction ever for the company. Swire, which last year shelved a plan to spin off its real estate unit, is building five shopping malls and offices in China including in Guangzhou and Chengdu.

“A large part of the proceeds will probably go to funding their China development,” said Castor Pang, head of research at Core-Pacific Yamaichi International Ltd. in Hong Kong. “This should be timely as it has now become more difficult for developers to borrow money in China because of the government curbs.”

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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