A Massively Hyped Land Auction In Hong Kong Just Ended In Disappointment

Li Ka Shing buys on the cheap

Cheung Kong (1.HK) ended up buying both land lots being sold today in a government land auction, with surprises both on the upside and on the downside.

On the upside, Cheung Kong bought the Yuen Long lot for HK$300 million, above market expectation (the market was expecting HK$200 million to HK$220 million).  The site can provide about 65,402 square feet of residential floor area.  At a plot ratio of 1 times, it is presumably earmarked for luxury houses.  The consideration implies an accommodation value (AV) of HK$4,587 per square foot, way above market consensus.

On the downside, the Borrett Road site in Hong Kong has disappointed.  The pace of the bidding has been extremely slow and boring at the beginning, and despite all the media focuses on this site in hope it will break the all-time record of HK$11.82 billion, it disappointed.  Cheung Kong bought this site for HK$11.65 billion, below the lower bound of market consensus (the market was expecting HK$12.2 billion to HK$15.2 billion).  The consideration implies an accommodation value of HK$26,763 per square foot.

Despite the surprising elements, that is not entirely inexplicable.  The Borrett Road site is a really big ticket site, thus there are only a handful of developers with a deep enough purse to purchase this lot.  Based on the current market prices of luxury residential properties on the Hong Kong Island, an AV of HK$26,763 per square foot can pretty much be viewed as a bargain.  The chances of losing money in buying this site at this price is quite small even if we see significant correction in the order of 20%.

On the other hand, the Yuen Long site is much smaller both in terms of size and price, such that smaller players will also be able to purchase this lot.  Also the site is suitable for building houses, which can be sold as really upmarket houses.  Thus, the result is not entirely inexplicable.

The biggest surprise to me would be the fact that Cheung Kong bought both the sites despite some of their rather defensive moves.  Or is it a big surprise?  The Yuen Long site is really nothing relative to Cheung Kong’s size, and the Borrett Road site is quite a bargain at that price level (at least at the current market prices for a luxury residential property at mid-level of Hong Kong Island).  Victor Li of Cheung Kong said to the media after the land auction that the net gearing of Cheung Kong is now close to 0%, consistent with his earlier management guidance of 0% gearing, thus the company has a very defensive financial position.  Thus the latest acquisitions will not really hurt even if property market corrects.  Perhaps Li Ka-shing is not as bearish as I previously thought, yet he is still far from very bullish.

As usual, I do not usually put a lot of weight on to land auction result, and this latest set of results does not change any bit of my previous assumptions.  I am maintaining my 2011 full-year base-case scenario of 0-10% rise in property prices, and in the face of recent tightening of liquidity due to tightening in China, I maintain my conjecture that the lower side of my base-case scenario will be more likely.  Given the fact that overall property prices are now in my bull-case scenario (which implies reaching the peak of 1997), my lower bound of the base-case scenario implies that a correction of roughly 10% or more will be probable.  Meanwhile, property prices are likely going sideway, hovering at the level close to the 1997 peak while transaction volumes dwindled.

This article originally appeared here: Hong Kong Property: Upside and Downside Surprises in Land Auction
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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