Property tycoons sit on massive land reserves

HONG KONG: The theory is simple: property prices are high in Hong Kong because land is scarce.

But it isn't. The top six developers, Cheung Kong (Holdings), Sun Hung Kai Properties, Henderson Land, Sino Land, Kerry Properties and New World Development, hold development projects that could provide flats adding up to 42.6 million sq ft of gross floor area when completed. This equates to about 43,000 flats with an average size of 1,000 sq ft.

However, the property giants are moving at their own pace. This makes sense since they have no incentive to flood the market and drive the value of their assets down. But it points to some of the challenges the government faces in moderating price rises.

"As developers have massive land banks in hand, they have full control of when and at what price level to sell flats," said Professor Eddie Hui Chi-man of Polytechnic University's building and real estate department.

He said the situation in Hong Kong may become like that in China where the central government is looking at land hoarding by developers.

Selling more land in Hong Kong should have undercut prices - but there is a limit to what the government can put on the block. After selling seven sites at auction this year, including lots in Argyle Street in Kowloon and Hung Hom Bay last month and No1 Ede Road, Kowloon Tong, last Tuesday, there is not much left.

The remaining 39 sites on the Lands Department's application list, available for developers to trigger for sale this financial year, can supply only 5.56 million sq ft of gross floor area. Given that some of the land will be for mid-sized apartments with an average size of 700 sq ft while the rest will be developed as luxury villas with an average size of 1,000 sq ft, these areas will provide about 6,700 flats.

This is only a sixth of the combined land banks of the top developers.

Under the list system, a site is auctioned if a developer bids enough to force a sale.

Taking into account farmland, the amount of land controlled by the main developers is even greater. Four of the big six, excluding Sino and Kerry, have amassed 86.3 million sq ft of agricultural land. Assuming a plot ratio of two — owners of such land are usually allowed a gross floor area equivalent to 0.5 to three times the size of the sites — that could be converted to supply up to 172 million sq ft of residential floor area.

But the developers still need to negotiate with the government on the land premium to be paid to convert the land to residential use.

Including farmland and old building acquisitions, Credit Suisse estimated earlier that Cheung Kong, Sun Hung Kai Properties and Henderson Land have land banks big enough to keep them going for four years, five years, and eight years, respectively. Assuming land supply does not increase, Credit Suisse said: "We believe developers will continue to adopt the high-price, low-volume strategy."

Economists and analysts say the developers' collection of land enables them to hold back projects to wait for higher prices. For example, Sino Land bought a site at the junction of Hoi Wang Road, Yan Cheung Road and Yau Cheung Road in the West Kowloon reclamation area in May 2007. After three years it has formed little more than the foundation.

"They may launch the project as close to 2015 as possible for a higher average selling price as a high-speed railway station will be completed by then," said one analyst referring to the terminus for the planned Hong Kong-Guangzhou rail link in West Kowloon.

If it is planning to do this, Sino Land is not saying. "At present, construction work has continued on schedule. The target date for the occupation permit is the end of 2011," a spokesman said.

Ken Yeung, an analyst at Citigroup Global Markets Asia, said developers had been accumulating land since 2004 when the government stopped regular auctions to prevent slumping property prices from sinking further. Developers pay for land upfront, but low interest rates — and a bullish outlook for property prices — encourage them to sit on assets.

"The interest cost is 2% to 3% a year nowadays, which is about half of the cost before 2004," Yeung said. "The land price, on the other hand, has been leveraging rapidly in these few years."

Noting that the Centa-City Leading Index, which measures average housing prices, had recently topped 80 points from about 30 in 2003, Yeung said: "This is like property prices climbing to HK$8,000 (RM3,204.53) per sq ft from HK$3,000". As the building cost has been stable at about HK$2,000 per sq ft, that means land value has multiplied from HK$1,000 to HK$6,000."

Not all land can be held indefinitely. For example, developers are bound by a government land lease to develop farmland within a specified period once it has been converted to residential use, says the Lands Department.

The department does not have any plans to prevent the development of large land banks. "Land acquisition by developers is a market activity. For the sites disposed of by the government by public auction or tender, it is through an open and competitive process. Any interested parties may participate in such sales," it said.

Last month, the government announced policies to regulate the market, which include banning confirmor transactions — resales before an initial deal has been completed — for new flats and increasing the down payment for sales above HK$12 million from 30% to 40%.

The Lands Department will also put up for auction this month and next month three areas designated for small to mid-sized flats. These sites in Chai Wan, Hung Hom and Fanling together can provide 540 flats. Financial Secretary John Tsang Chun-wah said more land would be put on to the application list to provide more than 9,000 flats in the next financial year.

When the cooling measures were announced, it led to a halving of flat sales over the following weekend and a fall in developer's stocks of 3 to 5% last Monday. But the market soon heated up again after Cheung Kong paid HK$7.61 billion — about 30% higher than forecast — to buy two sites in an auction on August 17.

Polytechnic University associate professor Lam Pun-lee said the government should speed up its schedule to put land from the Kai Tak development and West Kowloon Cultural District for auction. "We learn from economics that expectations can also affect market behaviour," he said. "A clear signal that the government will soon sell a large area of land from these sites would be strong enough to adjust the property market."

The government has yet to announce a clear plan and timetable for these sites. On Kai Tak, which will have more than 300 hectares of land, the financial secretary said only that it would eventually provide 16,000 flats and that land for about 4,000 flats should be available by 2015.

For the 40-hectare West Kowloon Cultural District, the residential development is limited to 20% of the gross floor area of the site. The West Kowloon Cultural District Authority launched a three-month public consultation on three new visions for the arts hub on August 20 and still has another round to go before a final blueprint is developed and submitted to the Town Planning Board for consideration next year.

Hui said the shortage of new flats in recent years had boosted housing prices. "There are almost 40,000 new households formed each year in Hong Kong. Besides the 10,000-odd new public flats built by the government, we need 10,000 to 20,000 new ones from the private sector," Hui said.

However, only 8,776 and 7,157 flats were completed in 2008 and last year respectively, down from about 26,000 flats between 2000 and 2004.

Developers say they have no difficulty in accumulating more land resources. "As a developer, land bank replenishment is required," a Sino Land spokesman said. "Sales depend on the timing of issuing a pre-sale consent."

Sun Hung Kai Properties said it had always been its strategy "to maintain a land bank adequate to accommodate four to five years of development needs".

Cheung Kong did not reply to inquiries. — South China Morning Post
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