Commentary

Hong Kong developers eye on long term prospects in Shanghai

Hongkong Land successfully secured a prime site on the West Bund of Shanghai in February showing continued strategic investment activities across the border despite being in the midst of the COVID-19 outbreak.

March 16, 2020

Since the beginning of the year, while attention has almost been singularly focused on the COVID-19 outbreak, one must not overlook the fact that there continues to be major strategic investment activities. On February 20, 2020, Hongkong Land successfully secured a prime 23.1 hectare mixed-use site on the West Bund of Shanghai from the Government via auction for RMB31 billion (US$4.4 billion). This acquisition signifies a strategic and important step for the company to spearhead growth on top of its stronghold in Hong Kong. Upon full completion, the scale of Hongkong Land’s commercial portfolio in Shanghai will be comparable to that in Hong Kong.

Located alongside the Huangpu River South Extension area in the Xuhui District of Shanghai, the site can yield an accountable gross floor area of about 1.1 million square metres, comprising Grade-A office, retail, residential and hotel. The term of the land use rights is 40 years for retail and hotel purposes, 50 years for office purposes, and 70 years for residential purposes. Approximately 24% of the accountable gross floor area may be developed for sale in accordance with the land grant.

As the announcement of the acquisition is right in the midst of the COVID-19 outbreak, it doubtlessly reflects Hongkong Land’s confidence in the long term prospects of Shanghai. In fact, the company is a seasoned investor, developer and operator in China, though the scale of this latest investment did raise many eyebrows.

It is also worth noting that this acquisition is just one of many instances over the past decades where Hong Kong property companies invested in the Mainland in scale, notably in mixed-use commercial developments. Shanghai is perhaps the biggest magnet for such investments, the Plaza 66 by Hang Lung Properties, the IFC and ICC/iAPM (and the upcoming ITC) by Sun Hung Kai Properties, HKRI Taikoo Hui, Jingan Kerry Centre and K11 by New World Development, to name just a few.

While domestic developers on the Mainland dominate the residential-for-sale market, the Hong Kong companies are playing a niche role in the commercial segment and have enjoyed much success, which can be attributed to the followings:

  1. Unified ownership.  A key pre-requisite facilitating asset management and operations, which in turn ensures the facilities are at all times maintained and presented to tenants and users at the most optimal state;
  2. Long-dated investments. The long-dated nature means that value growth and enhancement cannot be realized from near term cash flow, which is what their domestic counterparts remain highly focused on;
  3. Financial capacity and discipline. Hong Kong property companies are lowly levered and their cost of funds also among the lowest, which puts them in an extremely advantageous position in the underwriting process;
  4. Client relationships. Given their extensive track record and experience in Hong Kong and overseas, they can more readily leverage on their well established relationships with MNCs and introduce them to their portfolio in China;
  5. Best-in-class building specifications. The generally higher building quality and technical specifications provided by Hong Kong developers render these premises to be the desired accommodation options for anchor tenants;
  6. International best practices. Landlords from Hong Kong are generally more in tune with international best practices regarding real estate provisions, asset and tenancy management, hence the ability to address the most demanding client requirements.
Nelson Wong
Head of Research, Greater China
Research

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