Hong Kong builders face increases of more than 10 percent a year in construction costs because of competition for workers and materials from projects in China, according to Sun Hung Kai Properties Ltd., the world’s biggest developer by value.
“We’re seeing double-digit increases every year and we’ll be seeing this for quite some time,” Victor Lui, deputy managing director at Hong Kong-based Sun Hung Kai, said in an interview. “There’re a lot of projects going on in mainland China and we are competing with them for everything: materials, workers, even architects, designers and surveyors.”
The city is the world’s most expensive place to buy a home after prices rose more than 90 percent since early 2009 on a lack of new supply, an influx of buyers from other Chinese cities and record low mortgage rates. Rising construction costs may further drive up prices, which have now surpassed the level in 1997 on the eve of the city’s last major property crash.
Construction costs for most housing developments in Hong Kong range from HK$3,000 ($387) to HK$4,000 per square foot, with luxury projects costing more, said Lui, who joined the developer as a trainee in 1977.
“When homebuyers see costs going up at this pace, they would expect prices to rise in the future,” said Lui.
Sun Hung Kai reported staff costs rose 13 percent to HK$5.05 billion in the 12 months ended June 30 from a year earlier, according to its annual report published in September.
Sun Hung Kai has an estimated gross margin, a measure of profitability, of 41.6 percent for the current fiscal year, compared with 31.8 percent average margin for developers in mainland China.
The developer’s shares fell 0.6 percent to HK$111.80 at the close of trading in Hong Kong today. They have risen 15 percent this year, the least among the nine builders in the Hang Seng Property Index, which has gained 27 percent over the same period.
Lui, 57, was promoted to his current position in July to assist Thomas and Raymond Kwok, the company’s co-chairmen charged by Hong Kong’s anti-graft agency for conspiring to provide the city’s former No. 2 official with payments and loans for unspecified favors. Their case will be mentioned in court again on Oct. 12.
Lui declined to comment on the case and has previously said operations of the developer won’t be affected.
Sun Hung Kai, which generated the most new home sales among Hong Kong developers last year, is accelerating its pace of offerings again, according to Centaline Property Agency Ltd. Sales from the developer accounted for 22 percent market share in the first half of 2012, down from 35 percent in the full year of 2011, figures compiled by Centaline show.
The company aims to complete sales of 95 percent of the 1,075 units at its Century Gateway project in the city’s northwestern Tuen Mun district by Oct. 15, Lui said.
As many as 20 percent of the buyers of the project are “permanent Hong Kong residents with businesses in neighboring Shenzhen,” a city across the border between Hong Kong and mainland China within a 15 minute drive from Tuen Mun, he said.
Mainland Chinese buyers -- major purchasers of Hong Kong properties since the Chinese government began relaxing travel visas for its citizens to the city in 2004 -- accounted for only about 5 percent of the project, Lui said.
Buyers from other Chinese cities accounted for 17 percent of all Hong Kong home sales by value in the second quarter, the lowest since the first quarter of 2011, according to Centaline.
“We’re seeing a lot more wealthy Hong Kong families coming back to the market,” said Lui. “Many of them are shifting more of their assets from stocks to properties because of the volatility in the global financial market and also because of the low interest rate environment.”
Sun Hung Kai plans to start selling homes in at least six new residential projects and two office projects before the end of its current financial year in June, he said.
The developer last month reported underlying profit was little changed in the full fiscal year ended June.
Analysts at Goldman Sachs Group Inc., Standard Chartered Plc, HSBC Holdings Plc, Macquarie Securities and JPMorgan Chase & Co. have since raised their price targets for Sun Hung Kai, citing management’s confidence that home sales will pick up.
Sun Hung Kai sold 479 residential units for HK$10.5 billion in the first half of 2012, behind Sino Land Co. and Cheung Kong (Holdings) Ltd., according to Centaline.