| HONG KONG
HONG KONG Hong Kong's home builders are bidding cautiously on land to develop, wary of shrinking profit margins as the city's new leader pushes for more affordable housing in the world's most expensive residential real estate market.
Property developer Cheung Kong Holdings (0001.HK), founded by Asia's richest man, Li Ka-shing, bought only one new plot in the city in the first half of this year, an unusually quiet span for Asia's No. 2 developer by market value.
On August 10, Cheung Kong spent HK$9.6 billion ($1.24 billion) on a huge site above a subway station, but on condition set by subway operator MTR Corp (0066.HK) that half of the 2,384 flats are small, affordable apartments of not more than 540 square feet. Such units tend to generate slimmer profit margins.
"We were in a situation where they (developers) were making extraordinary, if not obscene, profits," Nicholas Brooke, the chairman of the real-estate consulting company Professional Property Services, said. "Now we'll return to where markets are a little bit more acceptable."
The property brokerage Savills last year rated Hong Kong's residential real estate the most expensive worldwide, topping other financial centers such as London and New York.
Hong Kong's new "chief executive" Leung Chun-ying, a former property surveyor who was elected without the backing of the city's powerful real estate tycoons, unveiled his housing policy in a surprise address on Thursday.
He introduced 10 measures aimed at cooling the property market and promised 65,000 new private apartments and 75,000 government-rental apartments.
The greater supply will likely eat into developers' margins.
Cheung Kong earned HK$15.5 billion in the first half of this year, a huge sum but down 54 percent from the same period a year earlier. Its gross margin was 44 percent, according to Thomson Reuters data.
Rival Sun Hung Kai Property (0016.HK), Asia's biggest property company, generated net income of HK$21.1 billion for the six months ended December 31, with a gross margin of 39 percent. Results for the June period are due later this month.
"Developers have already signaled that they believe prices will come down given the way they are bidding on land," Andrew Lawrence, Hong Kong property analyst with Barclays Capital, said. "Margins of 35 to 40 percent may not be sustainable."
As of early August, developers had spent only HK$17.8 billion on land since the start of the new tax year in March, although that doesn't include Cheung Kong's latest buy. Still, if that pace is sustained, spending would fall short of the prior tax year's tally of HK$67 billion.
Tenders on the two MTR sites - including the one eventually won by Li's Cheung Kong - were initially withdrawn when developers failed to match the price that the MTR was seeking for development above its train stations. Other land sales have come in towards the bottom end of surveyor expectations or have also been withdrawn.
Hong Kong home prices are up 12.3 percent so far this year, according to data from Centaline Property Agency, and have shot up 89 percent since the end of 2008, making it hard for lower-income households to get on the property ladder.
Singapore has had more success curbing its housing market. Prices there are up 48 percent since 2008, but they stabilized after the government introduced cooling measures in December, including a tax on foreign buyers who are not permanent residents. Prices rose just 0.3 percent in the first half of 2012, according to the Urban Redevelopment Authority.
The most effective measures in Hong Kong have been a stamp duty on quick re-sales, and reducing borrowing ability on apartments. Buyers are now required to put down half the value of any home worth more than HK$10 million, and 40 percent of any home above HK$7 million.
Leung faces a difficult task, however, with no control over a currency pegged to the U.S. dollar that has brought super-low mortgage rates of just over 2 percent.
David Faulkner, the executive director of valuation and advisory services for Asia at the brokerage Colliers International, expects Leung to boost the supply of private housing to 20,000 to 25,000 homes per year. Developers have produced just over half that in recent years, with Knight Frank estimating they will introduce only 11,888 new homes in 2012.
"In the old days, we used to build 35,000 units a year," Faulkner said. "We need to be at more than 20,000 and we haven't been getting close to that for the last few years. That should be enough to slow the rate in growth in prices."
Cheung Kong's Li struck a cautious note about Hong Kong real estate when the company reported earnings on August 2.
"The problem cannot be solved in a very short time," he said of the government's intention to bring prices under control. "We already have a plan and we know the economic situation. We are very careful."
Cheung Kong and Sun Hung Kai Properties, which dominate the market, have pledged to keep bidding on new land in the city.
"We expect prices in the private housing market to grow moderately by between 5 and 10 percent this year," a Sun Hung Kai spokesperson wrote in an email. "We will continue our active land acquisition and development strategy regardless of the government's initiatives targeted at subsidized public housing."
($1 = 7.7559 Hong Kong dollars)
(Editing by Emily Kaiser)