Hong Kong island.
Cheung Kong Holdings Ltd. brought its net debt-to-equity ratio down to 1.3 percent as of June 30, the lowest since at least 1991, while Henderson Land Development Co.’s is at the lowest since 2007, according to data compiled by Bloomberg. Sino Land Co. has HK$29.7 billion ($3.8 billion) available for land acquisitions after boosting its net cash position, according to BNP Paribas SA.
Developers, whose debt levels are now at their lowest in two decades, are on track to sell a record HK$150 billion of new homes this
year, reducing inventories and boosting cash reserves to help replenish land holdings after average prices fell 34 percent from last year. Prices may extend declines as Hong Kong’s government, which controls supply, releases more sites for sale to ease a housing shortage, according to CLSA Ltd.
“If you feel the market is reaching a peak, it’s better to sell down your inventory and pay down your debt so you’re fully cashed up going into a decline,” said Andrew Lawrence, an analyst at CIMB Group Holdings Bhd. in Hong Kong. “You can pick up a cheaper landbank and play the cycle.”
Li Ka-shing, chairman of Cheung Kong Holdings Ltd. and Hutchison Whampoa Ltd.
Debt Ratio
The average net debt-to-equity ratio for seven Hong Kong-based developers in the Hang Seng property subindex was 12.2 percent as of June 30, the lowest in more than two decades, according to data compiled by Bloomberg.Net debt of Sun Hung Kai Properties Ltd., the city’s largest developer by sales, was 12.2 percent of its equity at the end of its fiscal year 2013, the lowest since 2005, the data shows. The developer will bid for all sites released for sale except those it deems too small, Co-Chairman Thomas Kwok said last week at the company’s annual results briefing.
The developers referred to their earnings reports when asked about their acquisition plans. Sino, controlled by the family of Malaysian billionaire Ng, will “selectively and continuously” replenish its land holdings, while Li’s Cheung Kong pursued acquisition opportunities of properties and agricultural property. Henderson said it’s continuing to expand its landbank.
Cranes operate at a residential building construction site in the Kowloon City district... Read More
Land Sales
Hong Kong’s government is accelerating land sales to boost housing supply by 470,000 units over the next decade. Home prices ballooned after the government stopped regular land auctions in 2004 amid the Asian financial crisis and the SARS epidemic, only resuming them in 2011.The government is selling four sites this quarter that can accommodate 2,100 units, after it sold six sites with room for 1,500 units in the previous three-month period. Three of the four sites are in the New Territories, the largest of Hong Kong’s three regions and the least densely populated.
MTR Corp., the city’s government-owned railway operator, is also re-tendering a site atop a train station on which 2,900 homes can be built. The price was cut to HK$10.4 billion, 18 percent lower than two years ago, according to the South China Morning Post. The first tender in 2012 was withdrawn due to low bids.
While prices of some suburban land may fall as more sites are released for sale, prices in urban areas will remain steady as supply is limited, according to Simon Lo, head of Asia research and advisory at realtor Colliers International.
“Now developers are looking for high-quality sites in urban areas where they can be sure to attract homebuyers,” said Lo.
Henderson, Sino
Net debt of Hong Kong’s developers, which are among the most cash-rich in the world, may rise as they step up land acquisitions. Sun Hung Kai’s gearing ratio rose to 16 percent in the first half this year after it paid for a 21.8 billion yuan ($3.5 billion) commercial site in Shanghai. The company issued convertible warrants in April, which it said may raise as much as HK$22.2 billion for land purchases in Hong Kong.Cheung Kong, which hasn’t bought land since 2012, has about five to six years of reserves and may need to replenish soon as it sped up home sales this year, said Patrick Wong, an analyst at BNP in Hong Kong. Sino and Henderson both have about three to four years’ worth of land in reserve, he said.
Henderson, controlled by billionaire Lee Shau-kee, is paying HK$4.7 billion for a site in the prime retail district of Tsim Sha Tsui, 38 percent higher than the median estimate compiled by Bloomberg. The company is planning to invest a total of HK$6.5 billion to build a shopping complex on the site that is currently an abandoned parking garage.
Share Rally
Sino is working with Chinese Estates Holdings Ltd. on a redevelopment project in Kwun Tong district, an industrial zone in eastern Hong Kong where old factory buildings are being replaced with new commercial towers. The project is targeted to provide 1,700 residential units, according to the Urban Renewal Authority. The price, which wasn’t disclosed, is estimated to be HK$6 billion to HK$6.5 billion and is Sino’s largest land purchase in five years, according to a report this month by Jonas Kan, an analyst at Daiwa Securities Group Inc.Shares of developers have performed better than the market as a whole, driven by a rebound in home sales. The subindex of nine property companies rose 9.7 percent this year, compared with the 3.7 percent gain in the benchmark Hang Seng Index.
Henderson and Sino are among the top 10 best-performing shares in the Hang Seng Index this year. Henderson is the top performer in the index, with its shares up 38 percent. Sino has risen 23 percent and Cheung Kong has gained 11 percent.
‘Crown Jewel’
The rally has boosted the wealth of the property tycoons. Cheung Kong’s Li, whose diverse companies’ businesses include property, infrastructure and retail, is the richest man in Asia with a net worth of $31.6 billion, according to the Bloomberg Billionaires Index. Sino’s Ng has a net worth of $5.3 billion, while Henderson’s Lee is Asia’s second-richest person with a net worth of $25.5 billion.Developers have accelerated sales and offered discounts to lure buyers of new homes after the government imposed three rounds of taxes to thwart a housing bubble. The HK$150 billion of new homes they are expected to sell this year compares with a five-year low of $92.2 billion sold in 2013, according to Centaline Property Agency Ltd., the city’s biggest closely held realtor.
The urgency to sell homes, including their “crown jewels,” imply developers aren’t optimistic about prices going forward, Venant Chiang, a Jefferies analyst, said last month.
Being Prudent
While buyers snap up new flats, existing home sales still lag the historic average of 7,000 to 8,000 deals per month after the government in February 2013 doubled the sales tax on property. Existing home prices tracked by Centaline set a new high last month after falling as much as 5 percent from the previous record set last March.Home prices are expected to fall 10 percent next year and a further 5 percent in 2016 as residential supply increases and interest rates rise, CLSA’s Wong said. Hong Kong rates track those in the U.S. because the local currency is pegged to the U.S. dollar.
The risk of rising rates also has prompted developers to bulk up their balance sheets while borrowing costs are low, said Joyce Kwock, an analyst at Credit Suisse Group AG.
“If they don’t do this preparation, it won’t be as easy for them to refinance later, or it’d be at a higher cost,” she said. “They’re being more prudent.”
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