Trade storm puts Kai Tak flat off its game

Editorial | Mary Ma 10 May 2019

Hong Kong is ever full of hustle and bustle. Aside from the extremely controversial extradition law amendment, the government's sale this week of a prime site at the former Kai Tak airport was no less astonishing.

Priced at HK$12.59 billion - equivalent to HK$19,636 per square foot - how much would the units have to cost after they are built? The figures will be colossal, right? These flats are never meant for ordinary homebuyers.

The site is unquestionably full of potential from a developer's perspective, as each unit will share in the priceless harbor views. But is it really good value for money?

It depends on how the result may be viewed. For government officials, the sale was a mixed result.

On the one hand, it's a bucket of gold for public coffers, providing funding for projects.

On the other, it's bound to fuel the expensive property market that is now bouncing back from a short-lived correction.

Nonetheless, it's still possible to draw some insight from the formation of the consortium alone that offers some objective food for thought.

The consortium is crowded. In addition to ringleader Wheelock Properties, the others are Henderson Land Development, New World Development, Chime Corporation, China Overseas Land, and Empire Development. Most of them are household names, big enough to act independently should they wish to.

It wasn't the first time Wheelock, Henderson and New World have come together to act in concert, but the expansion of the club to include other developers was indicative.

One, the size of the investment is going to be substantial, expected to top HK$20 billion.

Two, the risks ahead are not to be ignored. The developers are clearly trying to mitigate the danger by forming a larger-than-usual pool to share the risk, even though this would also mean the revenues will be shared by more players.

Three, perhaps the most significant of all is that by purchasing the site at a high price, "cheaper" Kai Tak plots already owned by some of the consortium members will instantly become more valuable. That's a common trick whereby spending a relatively small amount of money to jack up prices would create an inflationary effect on existing inventory.

Wheelock and Henderson are major landlords in the area. New World also has interests in the locality.

Top dog Sun Hung Kai Properties - a tiger acting on its own most of the time - also submitted a bid for the latest Kai Tak site, but lost out to a pack of wolves. Had SHKP won, it would have to bear the entire risk, whereas the risk is now proportionately reduced through sharing.

Then, what are the risk factors causing the developers to be cautious?

The bids were entered when investors were high on the prospect of an end to the Sino-US trade war. Nobody had expected US President Donald Trump to escalate the tariffs on mainland goods. It's a deep sea bomb.

If Trump had activated the bomb earlier, would the developers have entered a lower bid? Most likely.

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