Although Hong Kong developers continue to show interest in replenishing land banks through government land sales, recent lackluster bidding for residential sites reflects their cautious stance regarding the outlook for the local market. Meanwhile, accommodation values (“AV”, or land value per square foot of the maximum developable GFA) achieved at these residential sites have also exhibited a downward trend. Referencing the recent land sale records, I reckon that the AVs achieved at sites in the Tseung Kwan O district in the New Territories can best illustrate the trend.

Tseung Kwan O has been one of the key districts for new land supply in recent years, with a total of 12 sites being put up for sale via government auctions/tenders since 2010. While no two sites are identical in terms of location or view, the 12 plots do share similar locality and broad development parameters (such as similar plot ratios), and, therefore, can be considered good comparables.

Source: Lands Department

As we can see from the chart, after reaching an all-time high of HKD 4,929 per sq ft in November 2012, the AV for the remaining sites in Tsueng Kwan O fell noticeably to HKD 3,654 per sq ft in June 2013 for the Area 68B1 site. Although the latest plot (Area 68B2) was sold at an AV that is 17% higher than Area 68B1, this largely reflects the majority of units enjoying unobstructed sea views (please see site maps below). However, if we compare this site with the other waterfront sites in the same area, Area 68A1 and Area 68A2, the AV fetched in Area 68B2 was actually 6-13% lower.

Source: Lands Department, Jones Lang LaSalle

We believe the recent land auction results reflect the cautiousness of developers regarding the market outlook, especially the government reiterating that it would stand firm on the current restrictive policy measures in the near term. With these measures in place, transaction volumes will continue to be low, and the market will remain limited to end user demand. In the absence of the strong investment demand seen in previous years, and with residential units at extremely low yields but facing a rising interest rate environment, the pricing power of developers for new residential schemes is limited. In fact, we have seen pressure on developers to maintain their cash flow position, and many have had to offer more incentives to attract buyers and ensure strong sales. I believe developers will likely continue to adopt such strategies going forward because of the weak market sentiment.

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