18 April 2019

A tale of two record land auctions

Within days of each other, Sun Hung Kai Properties Ltd. (SHKP) (00016.HK) and Sunac China Holdings Ltd. (01918.HK) paid record auction prices last month for sites in Shanghai and Beijing, respectively.

After the dust settled, SHKP shares had picked up 3 percent while Sunac had lost more than 7 percent.

What gives?

All things being equal, the fundamental difference in the way the market reacted to these developments had less to do with how much money changed hands but how long the companies will keep the investment.

After splashing out 21.77 billion yuan (US$3.56 billion) on a plot in Shanghai’s bustling Xujiahui {徐家匯} precinct on Sept. 5, SHKP said it is prepared to pour up to HK$40 billion into the development.

The unit price of the plot works out to 37,256 yuan, slightly above the current average. The site will be developed into a mega urban complex comprising shopping malls, office towers, hotels and serviced apartments, with a floor area on par with Hong Kong’s International Finance Centre, one of SHKP’s signature developments.

A five-year return of HK$20 billion will be well within reach, Citi said in a research note. Analysts said the massive project will be another profit center for the property giant given a wave of multinationals expected to flood into Shanghai, guaranteeing robust rental income.

On the other hand, Sunac, which snapped up the Beijing site for a record 73,000 yuan per square meter, the highest in a China land auction, is planning a high-end residential project. It expects to sell the units for 150,000 yuan per square meter, four times the average home price in Beijing.

While SHKP is looking to generate long-term income from leasing office and retail space — Shanghai’s commercial property sector suffers from a supply shortage — Sunac is aiming to score a quick profit by building luxury homes and clearing its inventory in short order.

There is also the small matter of financial strength.

SHKP enjoys strong cash flow and is expected to keep its net gearing ratio under 20 percent, even factoring in the cost of the Shanghai deal. It can afford to pursue long-term profit that is more stable but entails a far longer payback period.

Sunac has no such luxury. Its gearing ratio is already close to 80 percent.

– Contact the writer at [email protected]



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