Headwinds Loom for Hong Kong Land Amid Rising Supply, Few Takersby
Land premiums expected to fall faster than housing prices
Big developers will adopt a wait-and-see attitude in bidding
The Hong Kong government is expanding land supply amid muted demand from the city’s biggest developers, signaling that prices have more room to drop.
Builders including Sun Hung Kai Properties Ltd., the city’s largest by market capitalization, Cheung Kong Property Holdings Ltd. and Henderson Land Development Co. have been absent from the list of winning bidders for the eight parcels of land tendered by the government in the first half, as average land prices fell. They’ve been reluctant to stock up as home prices have slumped and sales of existing projects have been sluggish.
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Pressure on prices will likely intensify as the government presses ahead with plans to release more land for sale, in an effort to address severe affordability issues in the city. On Wednesday, it announced it will put out seven new plots of land for tender in the July to September fiscal quarter, with a capacity to increase the supply of residential flats by 4,760. Land prices will fall even faster than property prices, according to Secretary for Development Paul Chan.
“The reduction in land premium is expected,” Chan told a press conference in the city on Wednesday. “When the property price is going through downward adjustment, the adjustment in land premium is even faster.”
The rising supply comes as Hong Kong’s home prices have declined 12 percent from a peak in September. Developers have been offering discounts of up to 20 percent on new developments and other enticements including mortgages of up to 123 percent to help spur sales.
Hong Kong’s seven leading property builders took away no tenders from a total of eight residential sites from the government in the first half, according to Bloomberg Intelligence. That compares with their purchases of more than half of the 21 sites in 2011, according to Bloomberg Intelligence analysts Patrick Wong and Kristy Hung. An increase in the supply of development land since 2011, and the adoption of a tender system rather than a public auction, have shifted the playing field, making land more accessible to smaller developers and builders from mainland China, they said.
In an indication of the pressure on land prices, a parcel in Tai Po, in the New Territories district, in February sold for 70 percent less per square meter than a similar transaction in September. When prices are rising, builders can afford to buy land without rushing to develop and sell, because the land value is appreciating, said Cusson Leung, a property analyst at JPMorgan Chase & Co.
“Now that we have seen the peak of residential prices, sitting with too much land on the balance sheet is not the ideal strategy,” Leung said.
Henderson Land’s reticence at recent land sales was because redevelopment projects can be more profitable than bidding on government sites, Wong Ho Ming, an executive director, said earlier this month. Cheung Kong Property Holdings has held back because the government has been selling smaller parcels of land and it “isn’t worth it” for larger developers with higher overhead costs, according to Executive Director Justin Chiu.
“Constrained by the weakening local economy and the uncertainty in capital flow brought by the vote for Brexit, developers are expected to adopt a wait-and-see attitude towards land acquisition in next few months,” Hong Kong-based Dorothy Chow, regional director of the valuation department at Jones Lang LaSalle Inc., said. “Their offers for the sites in areas with more new housing supply would be more conservative.”