Hong Kong redevelopment authorities expect a project at a prime residential site to record a loss of HK$1.5 billion (US$192.2 million), as the winning bid recently awarded was far below the acquisition cost two years ago when the property market was peaking.
Urban Renewal Authority (URA) managing director Wai Chi-shing also warned on Sunday that future projects in Kowloon City, Mong Kok and Sham Shui Po could record a loss for the same reason, and it might face cash flow problems if external factors remained unchanged.
The HK$1.5 billion loss was expected at the URA’s project on Shing Tak Street in Ma Tau Wai, where a Sino Land-led consortium won the right to develop a plot with a bid of HK$1.93 billion.
Wai noted the bidding period between August and November coincided with a downturn in the property market, high interest rates and rising construction costs.
“Although the winning bid for the Shing Tak Street project differed by more than 20 per cent from the earlier market estimate of an average of around HK$2.6 billion, I believe that it was still within a reasonable range given the current market conditions,” he said on his blog.
He noted the URA proposed an acquisition price of HK$19,848 per sq ft in accordance with its compensation policy for the project in August 2021, when the Centa-City Leading Index – a gauge of secondary home prices – was at a high.
Under the current compensation arrangement, residential flat owners receive the cash equivalent of the market price of a seven-year-old flat in the same district, while owners of commercial units get the market value amount of their properties plus an allowance for operations.
“In the current downturn of the property market where the Centa-City Leading Index has dropped by approximately 20 per cent, the winning bid for the project was significantly lower than the acquisition price,” Wai said. “The project is expected to incur a loss of nearly HK$1.5 billion. This outcome was unavoidable.”
Hong Kong Urban Renewal Authority feels property slump pinch, but continues sales
Hong Kong Urban Renewal Authority feels property slump pinch, but continues sales
Wai stressed the development phase of the project was important as it would provide about 640 flats, more than three times the 150 first envisioned, and enhance accessibility for pedestrians.
He said the authority had considered not only market conditions and economic factors but also the overall societal benefits when reviewing the approval of the development contract for the project.
“Our approach was not only focused on seeking the highest price but rather on balancing various factors,” Wai said. “Hence, even if the project is projected to incur losses, the URA is still approving the development contracts and the projects will proceed as scheduled.”
If the external economic environment remained unchanged, future projects tendered by the URA might continue to face price pressure, he warned.
“The projected bidding income may not be sufficient to offset the acquisition costs,” Wai said. “This can pose an impact on the cash flow of the URA in the coming years and directly affect the scale and timeline of other projects involving property acquisition that we undertake.”
Hong Kong Urban Renewal Authority records HK$3.5 billion loss, first in 9 years
Hong Kong Urban Renewal Authority records HK$3.5 billion loss, first in 9 years
As an example, Wai noted that a residential plot in Kai Tak sold for HK$5.35 billion, or HK$5,392 per sq ft, in September, whereas the price of the Shing Tak Street project translated to HK$4,694 per sq ft – a 13 per cent drop in just three months.
But during the same period, the Centa-City Leading Index fell by about 5 per cent, showing land prices were falling more than prices for homes.
The URA recorded a rare deficit of HK$3.5 billion (US$448.7 million) in the last financial year, its first loss in almost a decade.