All tendered sites in the first eight months sell near or below market expectations

HONG KONG, 31 August 2022 – All tendered sites by the government so far this year were sold within or below market expectations, compared to 50% of the residential sites were sold at higher-than-market expectation prices in 2017, according to JLL's Hong Kong Residential Sales Market Monitor released today. JLL expects the developers will remain conservative in land bidding over the short term.

On 26 July, the Lands Department announced to award the residential site on Hospital Road in Sai Ying Pun to K. Wah for HKD 551 million or HKD 12,821 per sq ft, which was 1.3% below the lower end of market expectations. Meanwhile, Far East Consortium won URA’s Sung Hing Lane / Kwai Heung Street Development Project in Sai Ying Pun at an accommodation value of HKD 13,085 per sq ft, also below market expectations.

Norry Lee, Senior Director of Projects Strategy and Consultancy Department at JLL, said: "In 2017, when the housing market was still on the uphill, developers were more aggressive in land bidding. The several land sales this year achieved below or near the lower end of market expectations suggested that developers had turned more cautious in land bidding. Looking into the remainder of the year, we expect the weak sentiment in the land market to linger as several contributing factors that cap price rises, and push development costs higher will likely remain. The government will need to take these into account and adjust its reserve prices accordingly. Otherwise more unsuccessful tenders will likely result.”

One of the reasons that led to the softening sentiment in the land market was the mass housing prices are edging lower (-4.4% year-to-July, JLL Mass Residential Index), driving developers to tag higher risk premiums for developments. In addition, amid crowded new launches and dampened buying sentiment, developers generally adopted competitive pricing strategies to achieve decent sales velocity, as in the case of ‘Novo Land’ and ‘One Innovale’. Without room to factor in higher future sale prices, the residual scope for land prices also compresses.

Nelson Wong, Executive Director of Research at JLL in Hong Kong, said: “PRC developers who were more aggressive in the land bidding a few years ago also turned quiet in Hong Kong’s land market in recent years. Also, construction costs have risen considerably alongside inflation in materials. The Civil Engineering Works Index by Civil Engineering and Development Department reveals that construction costs recorded a leap of 10.8% in 2021, followed by another 4.3% increase year-to-May 2022. Land bidders will have to reduce land costs to maintain the desired profit margin.”

The cost of financing is also higher as the interest rates rise. While the one-month HIBOR has already risen 117 bps since the beginning of 2022, the prime lending rate is also expected to be raised as the banking system aggregate balances fall further. It will affect the offer of the developers in land bidding, he added.