Sun Hung Kai Buys West Kowloon Site for HK$42B as Market Slides

The Hong Kong government has sold the biggest plot of land ever put on sale in the Asian financial hub to Sun Hung Kai Properties for HK$42.23 billion ($5.4 billion), according to an announcement by the city’s Lands Department.

The winning bid for the commercial site above the West Kowloon high-speed rail terminus has also broken the record for the largest land premium ever paid in the city’s history for a single parcel, despite coming in at the low end of the expected HK$41.1 billion to HK$63 billion price range, as ongoing protests dampen developers’ confidence in the market.

The tender for the 643,000 square foot (59,735 square metre) site, which is designated for commercial use including hotels, attracted only two other bids, with one offer from CK Asset Holdings and a second tender from a consortium comprising Wharf Holdings, Sino Land, Henderson Land Development, Chinese Estate Holdings and Lifestyle International Holdings.

Initially forecast to fetch up to $100 billion when the site was unveiled by the government in March, Hong Kong’s largest developer by value is acquiring the plot at a discount after commercial property investment volumes in Hong Kong dropped by 41 percent in the third quarter compared with the same three months last year, according to Real Capital Analytics, as six months’ of social unrest have helped drive the city into a recession.

The bargain rate acquisition also comes just over two weeks after the largest plot on the site of Hong Kong’s Kai Tak airport sold at 24 percent below earlier expectations.

Seizing an Opportunity in a Cool Market

As Hong Kong winters a property market downturn, Sun Hung Kai harvested the city’s biggest site at the equivalent of HK$13,345 per square foot — 58 percent lower than the $31,645 per square foot price analysts had suggested seven months ago.

Located above the Guangdong-Hong Kong high-speed railway station at the junction of Lin Cheung Road and Austin Road West, the development site is three kilometres west of the Hong Kong Polytechnic University, where police laid siege to its Kowloon campus last week amid the worst clashes yet with protesters.

The mixed-use development, which includes provision for offices, hotels and retail space, could yield a total gross floor area of 3.16 million square feet, about 12 percent larger than Sun Hung Kai’s International Commerce Center, Kowloon’s tallest skyscraper, which includes in its lower floors the one million square foot Elements mall.

Thomas Lam, executive director of Knight Frank Hong Kong, told the Hong Kong Economic Times that although the final price for the West Kowloon plot came in at the lower end of the scale, it remained reasonable and indicated developers’ faith in the market over the long-term as well as their appetite for high quality projects.

Lam estimated that the project could cost between HK$65 billion to HK$70 billion to develop, while taking as much as 20 to 30 years to receive a return on capital investment, with long-term rental yield likely to be around three percent to 3.5 percent.

Leasing Downturn Gives Investors Pause

Despite the longer term potential, current market conditions appear to have cooled investor appetite for this latest mega-project, after average grade A office rents in Hong Kong in October took their biggest dip in ten years, according to JLL.

Grade A office rates in the city slid to an average HK$74.30 ($9.50) per square foot per month during the tenth month of 2019, down 1.6 percent from HK$75.60 per square foot in September.

A similar hesitancy to sign new property deals has been seen in recent land auctions, with the latest residential plot on the former city airport at Kai Tak sold at a large discount just over two weeks ago.

A consortium of Hong Kong-listed developers including China Overseas Land & Investment (COLI), Henderson Land Development, K Wah International and Wharf Holdings paid a land premium of HK$15.95 billion for the site, almost a quarter lower than the maximum HK$21 billion analysts had initially expected it to achieve.

In September, three months into Hong Kong’s pro-democracy demonstrations, the government cancelled the sale of a commercial site on Hong Kong’s former airport when all of the tenders came in below the reserve price.