Hong Kong’s largest Land transaction

Hong Kong’s largest Land transaction

China-based developers snag Ap Lei Chau residential site for $16.9b

A consortium formed by two China-based developers, KWG Property and Logan Property, defeated thirteen other developers and developer consortiums to secure a residential lot along the Ap Lei Chau waterfront through a government tender for HK$16.86b, substantially higher than market consensus.

According to DBS, this is the largest land transaction ever in Hong Kong in value terms.

“The high winning bid reflects China-based developers’ eagerness to venture into Hong Kong’s residential market.  This creates challenges for local developers to replenish their land bank. In 2016, over 40% of land supplied went to Chinese firms in terms of land premium. The two residential sites tendered year-to-date were snapped up by Chinese companies,”

This residential project will provide gross floor area (GFA) of 762,084 square feet (sf) when completed. The consortium intends to build large units which enjoy panoramic sea views. It is also a 5- to 10-minute walk to South Horizons MTR Station, from which it takes 11 minutes to reach Admiralty MTR Station. Including construction and interest costs, we estimate the breakeven cost to be HK$34,000psf on a saleable-area basis, which is more than 20% higher than the average selling price for China Overseas Land’s newly completed Marina South project in the area.

As the government will put up more quality land for sale this year, particularly in the Kai Tak area, it will be interesting to see if China-based developers have enough capital to snap up all of the sites. Inevitably, the current highly competitive land market would lower property development margins in the medium- to long-term.

The encouraging tender result should facilitate inventory sales of China Overseas Land’s Marina South project and even Sun Hung Kai Properties (SHKP)’s planned launch of Victoria Harbour on the North Point waterfront. Also, the encouraging tender result should help draw substantial market interest for the upcoming tender of MTRC’s Wong Chuk Hang Station development Ph 1. This should be positive for MTRC. We think the Chinese developers are likely to clinch the site.

The property-developer sector is trading at a 41% discount to our assessed current net asset value on a weighted-average basis. The sector is likely to trade range bound after the recent rally. Within the sector, we prefer SHKP, New World Development, and K. Wah International.

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