22 April 2019
Hong Kong authorities scrapped the auction of a luxury site located along Mansfield Road in The Peak as all the bids came in below the reserve price. Photo: HKEJ
Hong Kong authorities scrapped the auction of a luxury site located along Mansfield Road in The Peak as all the bids came in below the reserve price. Photo: HKEJ

Does the Peak land sale failure bode ill for HK property market?

The Hong Kong government’s cancellation of the sale of a luxury residential site in the upscale Peak area has fueled talk that the housing market in the city could be at a turning point. The tender for the plot on Mansfield Road was withdrawn as “the tendered premiums did not meet the government’s reserve price for the site,” the lands Department said last week.

The plot is located at a premium spot on The Peak, with the property seen yielding total gross floor area of 404,300 square feet. There had been buzz that the site could fetch as much as HK$48.5 billion.

But the tender was scrapped last Tuesday since five bids received all failed to meet the reserve price set by the government. Some industry participants criticized the government, saying it had overestimated the value of the plot. Questioning the “high land price policy”, they said authorities had also failed to factor in the vacancy tax imposed on empty, unsold flats.

In response to critics, Chief Executive Carrie Lam Cheng Yuet-ngor stated in a press conference: “We do not have a high price policy.” Yet, she added that “we will not sell our land cheaply.”

There has been a lot of talk as to what the failed land sale means for the housing market. From my observation, I can say that the city’s housing market can be divided into two separate markets: the “super luxe” segment, and the “non-super luxe” segment.

The super-luxe market refers to those in premium locations with unit prices of over HK$50,000 per square foot. A house there could easily fetch over HK$100 million. And the rest can be categorized in the “non-super luxe” segment.

In the “non-super luxe” segment, the business model for building the flats is less complex. Developers would add 10 to 30 percent profit margin when they bid for land for ordinary flats. Also,  there are frequent transactions for flats in this segment, which provides a relatively clearer price trajectory as a pricing reference. That has enabled developers to forecast the home prices for the near term.

Meanwhile, the super-luxe home is more like art, and price can vary a lot due to thin trade. The prices of these super luxe homes are less comparable. And the market segment is more vulnerable to the broad market sentiment, since it’s fairly difficult to find a potential buyer amid lackluster market conditions.

The Mansfield Road land sale drew bids from major Hong Kong developers including Sun Hung Kai Properties, Henderson Land Development, CK Asset Holdings and K Wah International. One of the bids represented a consortium consisting of New World Development, Nan Fung Development, Chinachem Group, China Overseas Land & Investment, Wharf (Holdings) and Sino Land.

China Overseas Land is the only mainland Chinese developer who joined the bid. We could see from this sale that mainland developers have largely been preoccupied with surviving the market downturn and withdrawing capital from Hong Kong.

Also, the site also requires intensive capital investment since it has several slopes nearby. That has also kept mainland developers away as they won’t place a heavy bet of several billion Hong Kong dollars on an unfamiliar development.

Generally speaking, the market should not read too much from the failed land sale. It just indicates that the housing market is not that red-hot. Instead, investors should watch closely the sales performance of recent “non-super luxe” market flats, which can serve as a more significant indicator for the general housing market in the city.

This article appeared in the Hong Kong Economic Journal on Oct 19

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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