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Morningstar | Sino Land Is Exposed to High Market Risk Amid an Elevated Hong Kong Residential Market

Sino Land is primarily a Hong Kong-focused property developer. Relative to other Hong Kong real estate companies, the key earnings driver for Sino Land is development properties. As a residential developer, the company is smaller than major players such as CK Asset, SHKP, HLD, and New World. In 2017, the company sold HKD 8 billion of residential properties, while CK Asset and SHKP each sold more than HKD 50 billion. While contract sales vary greatly year to year depending on the project pipeline, the main challenge facing the company is land bank replenishment in an elevated physical market.The land market changed significantly in recent years due to the emergence of mainland developers. In 2015 and 2016, they won 50% of the government land auctions. While they retreated a bit in 2017, the price in the land market remained elevated. Meanwhile, the Hong Kong property market faces a substantial risk of oversupply. Latest government data indicated primary market completion of 95,000 units over the next three to four years, outpacing the government’s target by 30%. Further, recent population growth rate has fallen below the government’s long-term growth assumption. Given the potential oversupply and an elevated market, several large Hong Kong developers looked to mitigate risk and ensure adequate margin by turning to farmland conversion and private redevelopment to replenish their project pipelines. It is also interesting to note the recent trend of developers disposing of land acquired at government auctions just months earlier to reduce market risk and pocket quick profitsSino Land’s primary method of land bank acquisition is through government auction channels such as land sale, railway property development projects (MTR) and redevelopment deals (Urban Renewal Authority). In 2017, Sino Land was the most active developer in Hong Kong in terms of land acquisitions. It acquired 8 sites totaling HKD 20 billion. Given the city’s property cycle, the firm is undertaking considerable market risk when units from these projects become available for sale. Reflecting that risk, most acquisitions, especially large ones are structured as consortiums with other developers.