Hong Kong Property:Land pusher,The myth of New West Kowloon?

Sold!

The Chinese Conglomerate HNA group successfully acquired another Kai Takresidential site within one month at a total sales value of HK$5.41bn, or a newrecord high AV of HK$13.6k psf in the district. It is 23% above the high end ofmarket estimate of HK$11k psf; 21 developers participated in this land tender.

We are sceptical towards the profitability of this investment given its high land price,131% higher than the average sold in 2014. We believe the developer has to eitherbe capable of commanding a high pricing premium to COLI’s project or the propertyprice needs to appreciate significantly in coming years to turn it profitable. Weestimate the ASP of the project to reach HK$20.0k psf in order to reach GP marginbreakeven, and HK$23.7k in order to achieve NAV neutral. COLI (688 HK) and KWah (173 HK) would be the key beneficiaries from recent HNA land purchases.

Implications

Land is king. We anticipate more challenges in land bank replenishment formajor developers, due to more active participations by mid-small scaledevelopers and Chinese developers. We believe developers with anexisting quality land bank will have a competitive advantage. Developerswith an insufficient land bank will gradually suffer from a loss in marketshare. We estimate Sun Hung Kai (16 HK) possesses the highest amount ofsaleable resources (>HK$200bn), which should enable them to capture themarket share for its peers that cannot replenish their land bank easily

Kai Tak district – good start in 2016, tough battle in 2017. The firstresidential project, COLI’s One Kai Tak (I), was launched in September. Saleswas robust with ~95% of 545 units sold within two weeks, fetching sales ofHK$4.8bn at an ASP of HK$15.8k psf (estimated 33% GP margin). However,we view 2017 challenging on this district given abundant new supply. One KaiTak (II) and K City already obtained presales approval and we estimate therewill be maximum of 3.9k units available for sales next year (Figure 1).

Up for sale

In the coming 4-5 weeks, there will be another 2 Kai Tak residential sites forsales. We expect the market to focus on the trend of the land cost in thisdistrict. Our top picks are SHKP (16 HK), Link REIT (823 HK), New World (17HK) and CK Prop (1113 HK).