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Analysts project bright prospects for Sun Hung Kai's HK$25B land acquisition

Sun Hung Kai Properties Ltd.'s May 15 winning bid of HK$25.16 billion for a mixed-use mega land site in Hong Kong has set a new record for the city's price for a single parcel of land, with analysts keeping a positive outlook for the acquisition and subsequent redevelopment of the plot.

While the price appears sky high for the current market, analysts are confident that the Hong Kong property giant can turn at least a 20% operating profit from the new project it has planned for the Kai Tak Area 1F Site 1 plot. The site also won the title of Hong Kong’s most expensive land ever sold through public tender, replacing the commercial site Nan Fung Development Ltd. bought for HK$24.6 billion in Kai Tak in June 2017.

The 16,556-square-meter site is located at the city's most actively developing Kai Tak area. It will be developed mainly into a residential estate, with a commercial area spanning 350,000 square feet.

The site is expected to yield a gross floor area of 1.42 million square feet, translating to HK$17,776 per square foot, 17% higher than the two sites in the same Kai Tak area acquired by Henderson Land Development Co. Ltd. from HNA Group Co. Ltd. for HK$16 billion just three months ago in February.

"Given Sun Hung Kai's brand name and strong execution, we expect it may replicate the successful launch of [its] Victoria Harbour or Ultima [developments] to position the project as super high-end and price it at HK$40,000 to HK$50,000 per square foot," CGS-CIMB Securities analysts led by Raymond Cheng, wrote in a note May 15.

A price tag of HK$40,000 per square foot means Sun Hung Kai can generate a 20% development margin, they added.

Nomura analysts echoed the view in a May 16 report, saying a 20% operating profit margin is "not unimaginable" for Sun Hung Kai, considering the convenient location of the site and the swift price growth of Kai Tak properties.

Sun Hung Kai's Kai Tak site is directly connected to the future Kai Tak metro station, making convenient transport links an attractive factor for property projects.

Nomura's analysts added that the gearing ratio of the Hong Kong developer should remain low at 13.2% after the acquisition.

Sun Hung Kai said it plans to invest a total of HK$40 billion to develop the site. In a May 15 interview with Reuters, deputy managing director Victor Lui Ting describes the prospects of Kai Tak as "glorious" as the government will be investing a great deal of resources into the Kai Tak district.

Kai Tak, which used to house Hong Kong's former international airport in the Kowloon East area, has emerged as the city's most competitive battleground for prime land among developers. The government has made Kai Tak's redevelopment one of the city's 10 major infrastructure projects to boost the economy.

The new Kai Tak development area will consist of a sports complex, a metro park, the Kai Tak Cruise Terminal and other public facilities.

The winning price of Kai Tak Area 1F Site 1 was "higher than our expectations," Thomas Lam, Senior Director at Knight Frank, told S&P Global Market Intelligence.

Lam said Hong Kong developers have been starved of land in prime locations and the latest transaction will undoubtedly push up selling prices even more and boost market sentiment for the Kai Tak area.

In the meantime, rating agency Moody's said Sun Hung Kai's record-breaking buy will have no impact on its credit profile.

"The company's high cash balance, strong recurring cash flow and low leverage can sufficiently support the cash outlay projected for this development in the next few years," said Stephanie Lau, a Moody's vice president and senior analyst.