Hong Kong's $3.2 Billion Land Sale Shows No Slowdown in Sight

(Bloomberg) -- Sun Hung Kai Properties Ltd.’s record HK$25.2 billion ($3.2 billion) purchase of a coveted plot near Hong Kong’s former airport signals that the city’s developers are brushing off concern that expected rate increases will damp the red-hot housing market.

Sun Hung Kai beat out bidders including units from CK Asset Holdings Ltd. and Henderson Land Development Co., paying almost one-and-a-half times the previous record for a land sale set in November.

Hong Kong developers are bracing for the first increase in the city’s prime rate in more than a decade as U.S. rate increases and declining liquidity on the back of a weaker Hong Kong dollar add pressure on key banks to boost the 5 percent rate, a cap for mortgages. The higher land prices signal that developers are confident demand will hold up in what’s already the world’s least affordable real estate market.

The Hong Kong property market will remain stable on “strong economy and very low unemployment rate," Siu Fung Lung, an analyst at CGS-CIMB Securities, said. Higher mortgage rates will do little to developer’s project pricing, he said. CGS-CIMB Securities believes home price will gain another 20 percent from 2018 to 2020.

Interest rates in Hong Kong are set to spike in coming months and the prime lending rate is likely to reach 5.75 percent by end-2018, in anticipation of more rate hikes in the U.S. this year, DBS Bank said in a note to investors on April 26.

“Whenever a prime rate hike happens, it will cause the property market to rethink the sanity of paying HK$10 million for 200 square-foot apartments,” CLSA Ltd. analyst Nicole Wong said last month.

Sun Hung Kai may be targeting the luxury end of the market, which is more inured to high rates. The Kai Tak site will be positioned as “super high-end” project and may be priced between HK$40,000 to HK$50,000 per square foot, CGS-CIMB Securities said in a research note.

The Kai Tak area in Kowloon has become one of Hong Kong’s hottest property markets, attracting a flock of investors in recent years. Chinese conglomerate HNA Group Co. snapped up four land sites there in quick succession, before coming under pressure to unload assets to repay debt. HNA has sold three of those four parcels this year for more money than it paid.

For Sun Hung Kai, which until now had owned no land in that area, the purchase fills a hole in its portfolio. Sun Hung Kai expects total investment in the development project to be HK$40 billion, according to a report from RTHK, citing a director at the developer. The company’s shares fell 1.9 percent in Hong Kong on Wednesday.

The land acquired by Sun Hung Kai has a maximum gross floor area of 131,495 square meters, the Lands Department said in a statement. The previous record sale in Hong Kong took place last November when a consortium including Sino Land Co. paid HK$17.3 billion for a plot of residential land with a maximum floor area of 91,770 square meters.

To contact the reporters on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net, Lianting Tu in Hong Kong at ltu4@bloomberg.net.

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Andrew Davis, Peter Vercoe

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