Little Hong Kong: PRC developers will be our new landlords (Part 16)

PRC developers aren’t playing around.  In January, the HNA Group, a PRC conglomerate, paid HK$5.53 billion (US$709 million) for its 3rd plot of land in Kai Tak at HK$13,000/sq. ft.  From previous biddings, HNA was expected to bid aggressively for a 4th plot for no less than HK$7.4 billion.  HK$13,000/sq. ft. seems to be the magic number as the “entry price” HNA Group has been winning bids in Kai Tak.  But what does this all mean?

A 300 sq. ft. apartment will cost HK$8.4m?

If a developer buys a piece of land at HK$13,000/sq. ft., it means after construction costs, a flat would need to sell for no less than HK$23,000 just to “break even.”   If the developer were to sell at a premium for profit, the price may need to be set higher at, say, HK$28,000/sq. ft. or above.  This means that a 300 sq. ft. apartment will cost at least HK$8.4 million.  A flat that size caters to young families looking for their first homes.

How much you need to pay up front to buy a flat?

To buy a HK$8.4 million flat, one might pay a 10% downpayment of HK$840,000, with stamp duty at the “old” rate of 3.75% (for first time buyers) of HK$315,000.  With agency fees and legal costs, you may expect to pay HK$1.3 million cash up front.  Should you go to the developer’s subsidiary for a 90% mortgage if you can’t get one from a bank, expect to pay high interest rates with monthly repayments of about HK$22,000, even with a 30 year mortgage.

How will PRC developers stand to profit?

Numbers don’t lie.   Such tenders have become so absurd that developers may not stand to profit in the short to medium terms.  Prices of completed flats will inevitably be out of touch with buyers’ means.  But that’s exactly my point.   The developers aren’t here for the short term.  They’re here for good.  And they’re also here to offload their RMB.   The very concept of the RMB flight is that money in the PRC is not “real” money.

As the RMB “devalues,” or returns to their “real” value depending on your perspective, mainland assets are shrinking.  Faced with uncertainty, together with impending rise of US interest rates, PRC conglomerates’ best course to protect their money is to buy overseas assets.  Moreover, in 30 years, they will have accumulated a land bank to outmatch local developers and will be in the position to call the shots.  In doing this, PRC developers will be the new landlords of tomorrow.

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