Developers in Hong Kong may see profit bonanza this year

HONG KONG: Property developers here could be heading for a profit bonanza this year as they cash in on tight supply and strong demand to release new projects at prices of up to 70% above current deals in the secondary market.

But analysts warn the developers are at risk of prompting further action from the government to curb what it may regard as excessive price growth, and the upward spiral in prices could be coming to an end.

"What is happening in the primary market this year is barely believable," said Michael Wu, a director of Fitch Ratings Asia Pacific corporates team. "Everywhere in Hong Kong new price records are set whenever new housing projects are offered  for sale."

Wu said he expected Sun Hung Kai Properties, which is on Fitch's rating list, to generate earnings before interest, taxes and amortisation (ebita) of more than 50% this year against 44% in 2009.

His bullish forecast was echoed by BOC International analyst Manfred Ho. "In general, most developments will achieve more than 40% profit margins in view of new flats being offered at high prices."

But surging prices have already caught the attention of policymakers, and Frankie Wong Kin-shing, chief operating officer at Pan Asian Mortgage, said the spillover of escalating luxury home prices to the mass residential sector had raised the government's concern.

"The government is highly likely to raise the stamp duty today (Feb 24)," Wong said.

On the cards in today's policy address, the market expects, is a move by Financial Secretary John Tsang Chun-wah to announce an increase in stamp duty for sales of luxury flats priced above HK$20 million (RM8.77 million), a move aimed at stemming the overheated property market.

It is believed the duty will be raised from the current 3.75% to 4.5%.

Wu said the high pricing strategy was fuelled mainly by historically low supply, an influx of hot money and low interest rates.

Data from the Transport and Housing Bureau show that only 7,200 new homes were completed last year, 18% less than a year earlier and the smallest number since 1972.

Given all these favourable market conditions, developers should have locked in handsome profits for projects that had been launched for sale this year, Wu said.

New World Development acquired the site for The Belcher's Hill in 2006 at an average cost of HK$2,000 per sq ft, Ho pointed out, and construction costs could have added some HK$2,000 to HK$3,000 per sq ft for a development cost of around HK$5,000 per sq ft.

Given sale prices for the project of between HK$8,500 and HK$13,000 per sq ft, the development could provide more than 40% profit margins for New World.

Sun Hung Kai Properties last Thursday announced the pricing list of the first 50 units at the 1,890-unit Yoho Midtown in Yuen Long at an average of HK$5,200 per sq ft. One unit was pitched at HK$9,089 per sq ft, an asking price equivalent to flats in Mid-Levels.

According to the Lands Department, the developer paid a premium of HK$1.49 billion, or HK$863 per sq ft, for converting the land use of the site in May 2004.

Surveyors believed its estimated development cost would be HK$2,000 per sq ft, compared with 900 units being sold at an average of HK$5,400 per sq ft, with some flats changing hands for HK$11,000 per sq ft over the weekend.

But the upward spiral in prices could be capped once the US and the mainland began to withdraw their stimulus measures, Wu cautioned. "Then interest rate hikes will increase investors' costs and they could be forced to dump flats in a bid to cut losses," he warned.

Li Kwok-suen, a fund manager at Phillip Capital Management, added his caution to the growing chorus of comments that the trend was not likely to last.

"The property sector is clouded by an uptrend of interest rates movements and the mainland's tough measures to cool the overheating market," Li said.

And Eric Yuen, an analyst at Guoco Capital, said the premiums being demanded by developers for new releases could scare off buyers.

"End-users will be more price-sensitive and it will be difficult to attract a huge buying interest from this market if the premium exceeds 30% over the secondary market," Yuen said.

Even property developers are expressing alarm at the rise in prices. This month, Cheung Kong (Holdings) executive director Justin Chiu Kwok-hung said prices had risen too fast and warned of a bubble.

Chiu said prices had risen about 40% from June to January and that buyers should not expect the same pace of growth this year. – South China Morning Post