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* Buyer sentiment, trading activity has improved - Cheung Kong
* Developers prioritise volumes over margins as price war intensifies
* Hong Kong home prices expected to reach new highs - Centaline
By Yimou Lee
HONG KONG, July 31 (Reuters) - Hong Kong property developers, recently vexed by a spate of government tightening measures, saw their earnings rebound in the first half thanks to robust demand. Analysts are pencilling in a sustained sales pickup for the rest of the year.
The city's second-largest property developer Cheung Kong (Holdings) Ltd posted a 59 percent rise in first-half net profit to HK$21.35 billion ($2.75 billion) on Thursday. Smaller rival Hang Lung Properties reported a 17 percent gain, driven by a 10-fold increase in sales.
Developers are now prioritising volumes over margins, offering steep discounts to attract end-users who are exempted from a series of government cooling measures, analysts say.
In late 2009, the government of the former British colony unveiled the first of a series of measures to cool one of the world's most expensive real estate markets. Hong Kong home prices have surged more than 120 percent since 2008 due to low interest rates, supply shortage and flush liquidity.
The first sign that the government is easing its cooling measures came in May when it proposed a scheme under which home owners who wish to upgrade their flats will have more time to sell their old homes. Owners currently only have a six-month window, a measure imposed to moderate quick resales.
The slight easing came a month after the city's leader said the property market is no longer "overheated". Since then, market sentiment has improved, prompting several industry watchers to raise their forecasts for home prices in 2014.
"Developers are now trying to lower the cost of land purchase in order to keep margins at certain levels," said Centaline Property Agency research director Wong Leung Sing, who expected home prices to continue to reach record highs in the third quarter.
"There's no doubt that their profitability is getting lower and lower, but they are not making a loss - not even close."
Developers could sell properties worth up to HK$130 billion ($16.77 billion) in the second half, more than double what they sold in the first half, said Morgan Stanley analyst Praveen Choudhary.
Cheung Kong, controlled by Asia's richest man Li Ka-shing, has recorded property sales of about HK$19.8 billion so far this year, the most among all Hong Kong developers, according to BNP Paribas. That helped the company to reach 66 percent of its annual sales target of HK$30 billion in Hong Kong, Reuters calculations show.
"Improvement in buyer sentiment and trading activity has been seen more recently, but increases in construction costs are expected to continue, and policy measures will remain a major factor in determining the direction of the local property market," Li said in a filing to the Hong Kong stock exchange after the market closed.
VOLUMES OVER MARGINS
Shares in the company have jumped more than 40 percent since February. They reached a record high on Wednesday after Morgan Stanley revised up its forecasts for Hong Kong's home prices this year to a 5 percent gain from a 10 percent drop.
With some 12,000 new units expected to be launched in the second half, according to Morgan Stanley, analysts said strong demand for smaller units from mass-market buyers should continue to boost sales.
However, developers' profit margins may suffer as a price war intensifies.
"At the end of the day, we believe it is net development earnings that matter, and we believe investors should focus on how development margins are likely to evolve going forward," Barclays property analyst Paul Louie said.
The price difference between new launches and second-hand homes - an indicator of developers' profitability - dropped to minus 3.8 percent in the second quarter of this year from 21 percent a year earlier, according to Barclays.
UBS had estimated earlier this year that profit margins for Hong Kong's six major developers would fall from 36 percent in 2012 to 20 percent in 2015 and 14 percent in 2016.
($1 = 7.7498 Hong Kong Dollars) (Reporting By Yimou Lee; Editing by Anne Marie Roantree and Ryan Woo)