(Bloomberg) — Hong Kong’s property tycoons are swooping in on a rare opportunity to cherry-pick prime land and projects in mainland China as their counterparts there battle a credit crisis.
The financial hub’s real estate developers are stepping up investments in the mainland, where a government squeeze on leverage and credit-market turmoil have triggered a record wave of defaults, limiting the ability of local builders to buy new land. Struggling developers such as China Evergrande Group and Shimao Group Holdings Ltd. are also being forced to put treasured assets on sale to alleviate their liquidity squeeze.
The push underscores the relative financial strength of Hong Kong’s developers and marks a reversal of earlier dynamics that saw mainland firms expand into Hong Kong. Little more than a year ago, Kaisa Group Holdings Ltd. was seen as an up-and-coming player in the city’s property market. By December the Chinese property developer was a desperate seller and in default.
“Hong Kong developers are seizing a downturn in China’s property market, but are also cautious in picking the high-quality projects with long-term potential,” said Michael Wu, a senior equity analyst at Morningstar Investment Service.
New World Development Co., one of the city’s leading developers, is betting big on the Greater Bay Area comprising Hong Kong and Guangdong province. China’s implementation of the so-called three red lines — metrics introduced to curb borrowing among its developers — has presented an opportunity, Chief Executive Officer Adrian Cheng said.
“New World can acquire very cheap land and land with high margins in a crisis,” the property heir, whose billionaire family runs the company, said in a post-earnings call late February. “This is what we call a quick win.”
Others are mulling acquisitions too. Swire Properties Ltd. plans to set aside HK$50 billion ($6.4 billion) to invest in mainland China over the next decade.
Hang Lung Properties Ltd.’s Vice Chair Adriel Chan said in January that “the sky is the limit” for the firm’s scale of potential acquisitions in mainland China. There are more opportunities in the Chinese market for lowly geared companies like Hang Lung, said Chan, who is the grandson of the company’s founder.
Ramping up mainland investments gives Hong Kong developers another avenue of growth as their own market gets saturated and the authorities pay greater attention to affordability, allocating more land to build public housing.
In China, the retreat of cash-strapped developers from government auctions, a traditional way for builders to acquire new plots, is suppressing land values. Average prices in February declined to the lowest since 2019, at 1,905 yuan ($300) per square meter, according to China Real Estate Information Corp., a local research provider.
Some Chinese cities are now effectively selling land to themselves to raise money.
Hong Kong players are likely to be interested in commercial property projects in first- and second-tier Chinese cities where their branding and management make them stand out, according to Philip Tse, director and head of Hong Kong and China property research at Bocom International Holdings Co.
That’s in contrast with residential property development, which hasn’t always gone to plan for the city’s developers, according to Patrick Wong, a real estate analyst at Bloomberg Intelligence.
“China’s competition in property sales is very strong, and there’s also policy risk — regulations suddenly get tightened then loosened,” Wong said. “If they happen to face a downturn in the market when their projects finish, the sales get stalled, so it’s quite challenging.”
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