Bidding war

The area known as Shanghai’s Causeway Bay: Xujiahui district

Last year Hong Kong’s Causeway Bay, a bustling shopping district, managed to edge out New York’s Fifth Avenue as the world’s most expensive location for retail rents. Rents averaged $2,630 a square foot a year, noted Cushman & Wakefield, a property agent, compared with about $2,500 a square foot on Fifth Avenue.

So perhaps it shouldn’t come as a surprise that when Hong Kong property giant Sun Hung Kai bought one of the most expensive pieces of land in China, it was touted as buying into “Shanghai’s Causeway Bay”.

After battling through 200 bids with competing Hong Kong developer Wharf, Sun Hung Kai Properties (SHKP) paid Rmb21.8 billion ($3.6 billion) for a site in Shanghai’s Xujiahui district last Thursday, says Shanghai Evening Post. That was 24.2% higher than the starting price of Rmb17.5 billion. The land – which could yield 584,200 square metres of floor space – is the final large lot currently available for sale in the city centre. Analysts reckon that Sun Hung Kai will spend a further Rmb20 billion building the project which is slated to house commercial buildings and five-star hotels.

“The acquisition will enhance the group’s stable recurring income base in the long term and will further strengthen its market position and brand in the property business (in China),” the developer said in a statement, adding that it will finance the project with internal and external resources, including bank borrowings where appropriate.

In addition to SHKP and Wharf, other Hong Kong developers like Henderson Land and Swire were also reported to have submitted bids for the site. Wang Jiji, chairman of Fortune Real Estate Group, said that the hectic bidding for the prime land reflected confidence in the Chinese economy, as well as a lower risk that prices will fall in first-tier cities like Beijing and Shanghai (in contrast to Wenzhou’s experience).

The Shanghai government has lofty goals for the site. According to Xinhua, local officials expect the new development to help in upgrading the central business district and enhancing the overall competitiveness of the city. Before the auction began, Shanghai bureaucrats did a pre-screening of the bidders to ensure that the winner came from a firm with extensive experience in the construction and operation of large commercial buildings.

SHKP is Hong Kong’s largest developer by market capitalisation and recently opened another office- and-shopping centre complex in the city called Shanghai ICC along Huaihai Road.

SHKP also built the Shanghai IFC, a mixed-use project that includes offices, retail and the Ritz-Carlton hotel, located in Pudong’s Lujiazui financial district.

When it comes to high-end commercial developments, Hong Kong developers have clear advantages, says Zhang Hongwei, a research analyst on the Chinese property sector. Not only are they experienced at tapping the capital market for funds to build and operate commercial properties, they also understand how to integrate new developments into subway and other transport facilities.

Interestingly, while other Hong Kong developers have piled into the Shanghai market, Li Ka-shing has been doing the exact opposite. Recently Cheung Kong and Hutchison Whampoa, both controlled by Li, sold their stakes in Oriental Financial Centre in Shanghai as well as disposing of a commercial building in Guangzhou for about $1 billion in cash, says Time Weekly.

“Li Ka-shing, known for his business acumen, just sold his stakes [in Shanghai and Guangzhou]. It’s a sign that shouldn’t be ignored by investors,” Wang Shi, chairman of Vanke, China’s largest property developer by market captialisation, wrote on his personal weibo after news about SHKP’s winning bid broke.

Does it suggest Li is bearish about China’s property market? “Li Ka-shing sold two mainland projects, one in Guangzhou and the other in Shanghai. The former is not very well managed so even if he didn’t sell it appreciation is going to be low. But as for the project in Shanghai, it’s hard to explain why he sold it,” Chen Limin from Prime Pacific Asset Management, told HouseChina.

“Even if Li sells, it doesn’t mean that the property market has peaked,” Chen then reassured.

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