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Morningstar | Sun Hung Kai Properties: Acquisition Price in Kai Tak on the High Side

Sun Hung Kai Properties acquired a land plot in Kai Tak through government tender last week. The latest acquisition totaled HKD 11.3 billion with the accommodation value near HKD 17,500 per square feet, 12% to 28% higher than comparable transactions recorded in November and December. With the plot facing southwest with a view of the Victoria Harbour, we believe the transaction price is high. Over the past two years, the company’s land acquisitions through government tender totaled 2 million square feet, comparing with nearly 5 million square feet in farmland conversion, and we believe the risk is manageable. We maintain our fair value estimate of HKD 153 along with our narrow moat rating.

Kai Tak had seen a number of transactions during 2018 through both government tenders and secondary market transactions. The overextended HNA Group unloaded three plots during first-quarter 2018 for around HKD 15,000 per square feet, retreating from its shopping spree in late 2016 that sparked the price jump for the area. In May 2018, Sun Hung Kai Properties paid HKD 17,700 per square feet for its first plot in Kai Tak, setting the record for the area. That plot boasted convenient transportation with the metro system nearby. Since then, government tenders for three plots opposite to Sun Hung Kai Properties’ latest acquisition showed prices retreating to HKD 13,500 by year-end 2018. HNA also reported that it is in negotiation to dispose its sole remaining plot.

In recent weeks, the market sentiment has improved in Hong Kong on the back of pending expiration of stamp duty and the government’s plan to allocate more land to public housing instead of private housing. However, the sentiment may turn quickly in the fast-moving Hong Kong property market, and it is unclear if the company’s late acquisition price will set a new benchmark or be a blip in the continued softening price trend.