Chinese firms target Hong Kong apartment buildings older than 50 years for redevelopment in bid to cut costs

Chinese developers from the mainland, have resorted to the use of mandatory auctions in order to get land at a cheaper price in Hong Kong. It is cheaper than acquiring land via government tender. Normally the land provided via government tender has an increased value. Often a project is able to attract a cost of close to HK$10 Billion inclusive of construction costs, according to Valuation and professional services managing director, Charles Cahn at Savills. Nevertheless, if one opts to use the compulsory auction, the project cost becomes very low.

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S&P Global Ratings analyst, Esther Liu confirmed that substitute land acquisition options can lead to higher margins. Capitalizing on the public tender to acquire land, has lower margins but lengthy development cycle as a result of its complexity.

In order to guarantee urban renewal, many landowners who happen to meet the Compulsory Sale for Redevelopment requirements can submit their applications to the able Lands Tribunal to guarantee a compulsory sale. An agent can be used to purchase land from an individual landowner. Once they get 80% or 90% for those buildings that are at least 50 years, a buyer /developer is free to apply to the able Lands Tribunal advocating for the sale of the entire building to allow redevelopment, regardless of whether the other owners want it or not.

The low costs emanating from compulsory auctions seem to have attracted Chinese developers from the mainland. Liberty Avenue provided a comprehensive idea on the way urban redevelopment has managed to revolutionize cities endorsed with buildings which have been existence for at least 50 years. The Chinese developers are really championing for a reduction in land costs.

There was a case between Vanke Property, the buyer and Savills, the auctioneer. Vanke Property was granted the rights of not only 13A but also 13 Liberty Avenue situated near Mong Kok. This 9 storey building was developed in the year 1964 and was sold through a compulsory auction amounting to HK$249.1 Million on 23rd April.

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Averagely, the cost of that building was around HK$11,320 for every square foot. Nearby there is the Kadoorie Lookout project belonging to Tai Hung Fai Enterprise that was completed 5 years ago. In March, its price was at least HK$22,605 for every square foot. If that was the price of that project at Liberty Avenue, then the gross profit of Vankees was supposed to be around 38.5%, making the construction cost to be HK$5,000 for every square foot.

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The government sold its land for about HK$13,701 for ever square foot. This land was at Kai Tak. Recently, the Kai Tak transactions have been about HK$20,047 for every square foot. If they were to retail at that price, Vankees will only enjoy a 7.2% gross profit. Construction cost would be at least HK$ 5,000 for every square foot. Therefore Vanke saved close to HK$2,382 for every square foot. Additionally, Vankee has attached compulsory auction on buildings located from 9 – 11A in Liberty Avenue.

The company had to redevelop a site it had acquired at around HK$860 Million in Wan ChaisLun Fat Street. The Hong Kong Apartment Rent ranges from HK$40 to HK$50 for every square foot on buildings that have been available for at least 30 years.

Regardless of the high Hong Kong Apartment rent in Luna, it has higher occupancy. Most tenants are law, finance and other professional executives. Vanke together with Agile Group is among the main developers in Hong Kong.