Hong Kong developers, exploiting a surge in prices since 2009, are selling shopping malls, offices and parking garages at the fastest pace in at least seven years to raise cash ahead of an increase in government land sales.
Sino Land Co. and Hang Lung Properties Ltd. are among builders divesting commercial property in the past six months. The value of such deals, excluding residential and land sales, more than doubled in the first half from a year earlier to HK$53 billion ($6.8 billion), the highest six-month tally since at least the first half of 2005, according to CBRE Group Inc.
Hong Kong’s new chief executive, Leung Chun-ying, pledged to put more land on the market in a bid to rein in home prices that jumped more than 80 percent since the start of 2009 and are now the world’s highest. The city’s developers, already among the world’s most cash-rich, are offloading assets that have risen in value to prepare for the land rush.
“This is something developers have rarely or never done in the past,” said Dominic Chung, an executive director in Hong Kong at the investment-properties unit of Los Angeles-based CBRE, the world’s biggest commercial broker. “Developers are gathering ammunition because there’ll be more sites available. At the same time, they don’t like what they see in the loan market.”
The three-month Hong Kong-dollar interbank lending rate, a benchmark for lending in the currency, has risen 14 basis points in the past year to 0.40214 percentage points, the highest level in more than two years.
Hong Kong developers are seeking to replenish precious land reserves as the government, the city’s biggest supplier of unoccupied residential sites, resumed regular sales last year after a seven-year hiatus. Sales had been sporadic since 2004, when the government stopped regular auctions after home prices plunged 70 percent from their 1997 peak amid the Asian financial crisis and the SARS epidemic.
Home sales at developers including Sun Hung Kai Properties Ltd., the city’s biggest, and Sino Land have been dented by government measures such as extra transaction taxes and higher mortgage down-payment requirements.
“Developers have to use the disposal of these noncore assets to bridge their earnings gap,” said Nicole Wong, an analyst at CLSA Asia-Pacific Markets in Hong Kong. “Many developers are concerned about earnings stability. They may also see the current level as peak pricing.”
The average price of Hong Kong offices rose 3.6 percent in the second quarter from the previous three months to HK$23,700 a square foot, CBRE said. The value of prime-street shops rose more than 10 percent to almost HK$218,000 per square foot.
Prices for offices and retail properties will remain flat in the second half of this year because of uncertainties over the global economy, said Marcos Chan, regional head of research at Chicago-based broker Jones Lang LaSalle Inc.
The average debt-to-common-equity ratio among the city’s 51 biggest listed builders is 58 percent, according to data compiled by Bloomberg. That compares to 135 percent for developers in other parts of China and 66 percent for those in Singapore.
Hang Lung, Hong Kong’s third-biggest developer by value, in May sold a building in the city’s northwestern Kwai Chung district for HK$528 million and a carpark in the Tin Hau district, in the east of Hong Kong Island, for HK$220 million. It was the first time Hang Lung sold noncore commercial assets in Hong Kong since 1998, according to spokesman Kwan Chuk-fai.
“We’ve been saying we wanted to do this for a while,” Hang Lung Chairman Ronnie Chan said in an interview last month. The developer, which is investing at least $8.5 billion building shopping malls in other parts of China, will continue to sell assets in Hong Kong “if the prices are right,” Chan said.
Hang Lung, which derives almost half its rental income from other parts of China, is seeking to build up more cash reserves as it awaits a pullback in land prices, Chan said in the company’s annual report in January.
The developer is in talks to sell its Laguna Plaza, in Hong Kong’s northeastern Kwun Tong district, an area of largely industrial complexes and lower-middle class housing, to an unidentified investment fund for more than HK$1.8 billion, the Hong Kong Economic Journal newspaper reported July 5, citing people it didn’t name. Kwan declined to comment on the report.
Sino Land and its parent in March sold an office building in the city’s eastern Kowloon Bay district to a unit of China Construction Bank Corp. for HK$2.5 billion, booking a net gain of HK$390 million.
That came after the developer, controlled by the family of Singapore’s richest man, Robert Ng, in December sold a shopping mall in the northeastern Tsueng Kwan O district to Link REIT, Asia’s biggest property trust, for HK$588.4 million.
New World Development Co., controlled by Hong Kong’s third-richest man, Cheng Yu-tung, is offering to sell Riviera Plaza in the northern Tsuen Wan district for HK$1.2 billion, the Hong Kong Economic Times newspaper reported June 28. Fiona Wan, spokeswoman for New World, declined to comment on the report.
Swire Properties Ltd., the biggest landlord in eastern Hong Kong Island, booked an HK$8.6 billion profit from the sale of the Festival Walk shopping mall in the Kowloon Tong area in July last year to Singapore-based Mapletree Investments Pte.
Buyers of such properties, mainly professional investors, pensions, private-equity funds and wealthy families, are seeking out the assets for their stable returns, said CBRE’s Chung. The average yield on commercial properties in Hong Kong is 2 percent to 4 percent, according to Wong Leung-sing, a research director at Centaline Property Agency Ltd., the city’s biggest closely held realtor.
The 49 stocks in Hong Kong’s benchmark Hang Seng Index have an average estimated dividend yield of 3.81 percent for 2012, according to data compiled by Bloomberg. Yields on government bonds are close to zero as the city’s interest rates are tied to the U.S. Federal Reserve.
Retail rents in the city, now the world’s second highest behind New York’s Fifth Avenue, will probably increase 12 percent this year even as the number of tourists to the city is expected to slow following a pullback in the Chinese and global economies, according to Colliers International, a Seattle-based broker.
Donald Tsang, Leung’s predecessor, tried to rein in home prices by last year resuming regular land sales halted in 2004 as part of measures to revive the real estate market after the dot-com bubble, the Sept. 11 terrorist attack in the U.S. and the Severe Acute Respiratory System outbreak in 2003.
Since 2004, the city only held land auctions after a developer promised to pay a minimum price for sites on a list prepared by the government each year.
The government will sell as many as 47 sites in the fiscal year ending March 2013, it said in February. That compares with the 40 sites it sold at auction and through tender in the previous 12 months for HK$66.9 billion, according to the Lands Department website.
Hang Lung, which hasn’t bought land in Hong Kong in at least a decade, and Sino Land were among builders that earlier this month took part in a tender for a government site that was won by Sun Hung Kai Properties Ltd. for HK$6.91 billion.
The government may boost housing supply about 40 percent annually, according to CLSA.
Hong Kong home prices may fall as much as 20 percent in the next 12 months on increased supply and the global economic slowdown, according to a report last month by Deutsche Bank AG.
Developers in Hong Kong have enjoyed record revenue as home prices were underpinned by record-low interest rates and demand for the city’s apartments from buyers from other parts of China. Those earnings may not be sustained as economic growth slows both in the city and in China.
Hong Kong may lower its 2012 economic forecast next month as the outlook for global growth deteriorates, Financial Secretary John Tsang said July 8. China’s economic growth may cool to 7.4 percent this quarter after slowing to 7.6 percent in the three months ended June, the weakest pace in three years.
Sun Hung Kai will report a 7 percent decline in revenue for the six months to June 30 from a record HK$67 billion in the previous half year, according to the average estimate of 18 analysts surveyed by Bloomberg News. Sino Land, which makes almost all of its earnings in Hong Kong, may post a 3.4 percent drop in sales in the period, according to a survey of 14 analysts.
“Some of these properties were built a while ago and their values have gone up so much since then,” said Antonio Wu, deputy managing director in Hong Kong for Colliers. “Maybe they aren’t seeing that much upside anymore.”