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End of 'obscene' profits may be at hand for HK property firms

HONG KONG -- Hong Kong's home builders are bidding cautiously on land to develop, wary of shrinking profit margins as the city's new leader pushes for more affordable housing in the world's most expensive residential real estate market.

Property developer Cheung Kong Holdings, founded by Asia's richest man, Li Ka-shing, bought only one new plot in the city in the first half of this year, an unusually quiet span for Asia's No. 2 developer by market value.

On Aug. 10, Cheung Kong spent HK$9.6 billion (US$1.24 billion) on a huge site above a subway station, but on condition set by subway operator MTR Corp. that half of the 2,384 flats are small, affordable apartments of not more than 540 square feet. Suc h units tend to generate slimmer profit margins.

“We were in a situation where they (developers) were making extraordinary, if not obscene, profits,” Nicholas Brooke, the chairman of the real-estate consulting company Professional Property Services, said. “Now we'll return to where markets are a little bit more acceptable.”

The property brokerage Savills last year rated Hong Kong's residential real estate the most expensive worldwide, topping other financial centers such as London and New York.

Hong Kong's new Chief Executive Leung Chun-ying, a former property surveyor who was elected without the backing of the city's powerful real estate tycoons, unveiled his housing policy in a surprise address on Thursday.

He introduced 10 measures aimed at cooling the property market and promised 65,000 new private apartments and 75,000 government-rental apartments.

The greater supply will likely eat into developers' margins.

Cheung Kong earned HK$15.5 billion in the first half of this year, a huge sum but down 54 percent from the same period a year earlier. Its gross margin was 44 percent, according to Thomson Reuters data.

Rival Sun Hung Kai Property, Asia's biggest property company, generated net income of HK$21.1 billion for the six months ended Dec. 31, with a gross margin of 39 percent. Results for the June period are due later this month.

“Developers have already signaled that they believe prices will come down given the way they are bidding on land,” Andrew Lawrence, Hong Kong property analyst with Barclays Capital, said. “Margins of 35 to 40 percent may not be sustainable.”

As of early August, developers had spent only HK$17.8 billion on land since the start of the new tax year in March, although that doesn't include Cheung Kong's latest buy. Still, if that pace is sustained, spending would fall short of the prior tax year's tally of HK$67 billion.

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In this Aug. 2 photo, Asia's richest man, Li Ka-shing, and his son, Victor Li, left, attend a press conference for Cheung Kong Holdings' first-half earnings in Hong Kong. Hong Kong's home builders are bidding cautiously on land to develop, wary of shrinking profit margins as the city's new leader pushes for more affordable housing in the world's most expensive residential real estate market. (AFP)

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