Squeezed by banks' reluctance to refinance its loans, HNA Group Co. may be under pressure to sell some of the land in Hong Kong for which it paid spiraling sums, or find alternative financing.
If you think that means the end of Chinese developers' Hong Kong dreams, think again: They're just beginning. Price growth and potential returns relative to the mainland are too good to ignore.
HNA's global takeover binge, backed by loans from state banks, grabbed headlines for months. The firm was busy in Hong Kong, spending billions of dollars and setting records to buy four plots of land between November 2016 and March this year. Then the ax fell: HNA was embroiled in an investigation by Beijing, it was disclosed in June, along with China's other privately held deal titans -- Dalian Wanda Group Co., Fosun International Ltd. and Anbang Insurance Group Co.
While HNA has won no Hong Kong government land auction since June, its compatriots -- Longfor Properties Co., China Overseas Land & Investment Ltd. and Shenzhen Investment Ltd. -- have successfully tendered in partnership with local companies.
Every sale this year has involved Chinese developers. They bought HK$38.6 billion ($4.9 billion) of land from the Hong Kong government in January-June, or 96 percent of all transactions by value, compared with 39 percent of the total in all of 2016, according to Bloomberg Intelligence analyst Patrick Wong.
And they'll keeping coming. Chinese developers, despite extraordinarily high leverage levels, are actually cash-rich, thanks to booming mainland property sales. The debt problems of China Evergrande Group are common fodder for headlines, yet the company has the second-largest war chest after China State Construction Engineering Corp., according to data compiled by Bloomberg.
Chinese real estate firms don't have a lot of places to put their cash. That's because local governments, which once relied on land sales for funding, have since 2015 been able to tap bond markets instead. So the developers can either buy one another's assets -- as Sunac China Holdings Ltd. and Guangzhou R&F Properties Co. did with Wanda -- or cross an increasingly faintly drawn border.
As well as getting access to land, property firms can juice up returns more effectively. In China, they must pay cash. Across the border, they can borrow up to 50 percent of the land's value. A developer must make do with a net profit margin of 8 percent on the mainland, versus as much as 18 percent in Hong Kong, according to CLSA analyst Nicole Wong. Add to that an increasingly strong yuan against the Hong Kong currency (which is pegged to the dollar) and you have a recipe for alluring returns.
There's a "follow-the-customer" trend at work, too. Hong Kong has seen an influx of mainlanders, among them professionals with the means to spend on the city's overpriced real estate. Graduates of a four-year university course need only work another three to win permanent residency, avoiding the extra stamp-duty payments that hobbled foreign buying of property in the past year.
Gains aren't guaranteed. Beijing's capital controls, rising interest rates and increasing home supply may hurt Hong Kong prices, Morgan Stanley analyst Praveen Choudhary reckons. He says residential price growth has peaked and predicts a flat market in 2018.
That's unlikely to deter China's developers. Unless they're HNA.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
HNA announced more than $40 billion of overseas purchases since the beginning of 2016, according to data compiled by Bloomberg.
The term gained currency after Premier Li Keqiang used it earlier this year.
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