Wheelock's HNA Buy Shows Hong Kong's Unshakable Property Faith

(Bloomberg Gadfly) -- Three down, one to go. Fire sales aren't usually associated with handsome profits; lucky for HNA Group Co. that its asset hoard includes Hong Kong real estate.

The indebted Chinese conglomerate has sold the third of four plots of land bought just over a year ago to local developer Wheelock & Co. for HK$6.36 billion ($811 million), the latest step in HNA's reversal of a $40 billion acquisition spree. As with the first two, it looks to have made money.

Wheelock agreed to pay 15 percent more than HNA tendered for the 7,318-square-meter site at the former Kai Tak airport last year, when the Chinese company outbid the Hong Kong property heavyweights that have traditionally dominated the market.

Prices were already near a record at the time of HNA's purchase, but have continued to advance since. The premium Wheelock is paying is roughly in line with the 15 percent increase over the past year in a widely followed index compiled by Centaline Property Agency. HNA sold the first two sites to another local company, billionaire Lee Shau Kee's Henderson Land Development Co., last month for a return of about 10 percent after costs.

Wheelock's HNA Buy Shows Hong Kong's Unshakable Property Faith

The fact that Hong Kong developers are willing to take assets off the hands of a distressed seller at premium prices shows the strength of confidence in the world's least affordable housing market, even as prospects for U.S. monetary tightening put pressure on the city's currency peg to the dollar.

While HNA has reason to be pleased, the buyers also look like they're on to a good thing. There's little immediate threat to Hong Kong's ultra-low mortgage rates, and government attempts to cool the market with measures such as higher taxes and down-payment restrictions have proved ineffective. 

As Gadfly has written, the hottest segment has been sales of new homes, where developers have blunted the impact of mortgage curbs by offering top-up loans.

Just 70 percent of the 61,579 apartments sold last year were second-hand, according to data from Jones Lang LaSalle Inc. and Hong Kong's Lands Department. That share has fallen from 90 percent in 2010. Secondary market sales volumes have slumped 50 percent since the government began introducing cooling measures in 2009.

Wheelock's HNA Buy Shows Hong Kong's Unshakable Property Faith

Developers aren't constrained by rising loan-to-value limits set by the government and have offered other incentives such as covering the cost of stamp duty, which government has raised to 15 percent for buyers of second homes and 30 percent for foreign purchasers.

Hong Kong developers are cash-rich and can afford to keep offering financing for buyers priced out of the second-hand market. That should ensure demand remains strong, even in a city where property prices have tripled since early 2009.

HNA has one more plot of land left at Kai Tak. Don't be surprised if that also goes to a local developer. Sun Hung Kai Properties Ltd. and Li Ka-shing's CK Asset Holdings Ltd., among the biggest, have yet to snap up any of the Chinese group's cast-offs. Maybe it's time for one of them to wade in.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

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