Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

A record bid for a car park in Hong Kong's central business district could be an indicator the city's crazy commercial property price boom is about to end.

Henderson Land Development Co. paid HK$23.3 billion ($3 billion) for what was the first piece of commercial land to be sold by the government in the city's Central district since 1996.

Office space in Central ranks among the world's priciest, ahead of London's West End and midtown Manhattan. Vacancy rates were just 1.5 percent in the first quarter, according to a March survey by CBRE Group Inc.

Work It
Hong Kong is the world's most expensive office market, with rents in Central going for $264.27 per square foot
Source: CBRE Research, Q4 2016

The price Henderson paid signals the top of a market. Having effectively forked out HK$50,000 a square foot, Henderson would need to sell at a price of at least HK$60,000 to recover construction and development costs. The most expensive office spaces in Hong Kong are currently going for around HK$39,700 (at 9 Queen's Road, Central). The developer's shares fell as much as 2.9 percent in trading Wednesday.

Also striking was the relative absence of mainland developers, long a driving force in the city's residential market. C C Land Holdings Ltd. and Shimao Property Holdings Ltd., as part of a consortium led by local firm Sino Land Co., were the only two Chinese companies in the bidding.

Borrow With Care
Hong Kong's property developers tend to have lower gearing than their mainland counterparts
Source: Bloomberg

For the absence of mainland developers, Hong Kong firms have the central bank to thank.

The Hong Kong Monetary Authority tightened limits on bank loans to property developers earlier this month, saying that from June 1, developers can only borrow up to 40 percent of a site's value, down from half currently. It also cut the cap on loans for construction costs, to 80 percent from 100 percent, while the overall limit on bank financing for an entire project was reduced to 50 percent of the expected value of the property, from 60 percent.

Skyscraper
Chinese developers have very high net debt-to-equity levels
Source: Bloomberg Intelligence
Note: Shows figures for 2016. Perpetual capital securities classified as debt when calculating leverage.

That's significant because it's typically the Chinese developers needing loans rather than the local ones. According to Bloomberg Intelligence analyst Patrick Wong, the average net debt-to-equity ratio of six major Hong Kong developers was 22 percent at the end of 2016, versus 110 percent for 20 firms from the mainland. Beijing has also imposed various capital controls that make it harder to get money out.

Hong Kong developers' new-found breathing space may be short-lived, however.

Options outside of Hong Kong's Central district are expanding and rather than pay CBD rents, some companies are looking further afield at places like Quarry Bay in Hong Kong island's east. And while Central is full to bursting, the supply of commercial real estate overall in Hong Kong is rising: Citigroup Inc. forecasts that office completions should reach 3 million square feet this year with another 2.5 million square feet coming online next year, exceeding demand.

Hong Kong's home buyers may have to wait a while before residential prices start to fall. But it looks as if commercial real estate has already hit the down button.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates to add share-price move in fourth paragraph. An earlier version of this column was corrected to amend the description of office costs in same paragraph.)

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net