Office Plot Good News for Neighbors As It Shatters World Record in Hong Kong

 | May 18, 2017 | 10:00 AM EDT
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It's worth getting a parking fine in Hong Kong, as the tycoons who litter downtown with their Alphards well know, because parking will cost ya. A five-floor public parking lot has, in fact, just set a record as the most expensive plot of commercial land in the world, pound for pound.

Henderson Land Development (HLDCY) paid HK$23.3 billion ($3.0 billion) for the government-owned site. Of course, it's not important at all that you can park there now. What's important is the size of the skyscraper you'll be able to build once you get rid of all the cars. 

So who cares? The site on Murray Road is in Central, Hong Kong's equivalent of Wall Street. Properties here command world-record prices both in terms of value and rents. 

The price is already driving up the value of nearby buildings and the portfolios of developers such as Hongkong Land (HNGKY) and Cheung Kong Property Holdings (CNGKY) , both with large amounts of office space in the city.

Henderson's share price fell 2.9% immediately after news of its big win. Other developers, though, saw gains, Cheung Kong up 1.2% and Sun Hung Kai Properties (SUHJY) up 1.1%.

Henderson beat out eight other developers, including Sun Hung Kai and Cheung Kong, the development arm of Hong Kong's richest man, Li Ka-shing. His $32.5 billion bankroll (according to Forbes) just got a little fatter -- the net asset value of Cheung Kong's property holdings just rose by HK$5 per share, according to J.P. Morgan.

Unlike those companies, Henderson Land does not have a flagship building named after it in Hong Kong. It's likely that this will become the company's new headquarters. Henderson said it would be a "landmark office building", with store space on the ground floor when finished around 2022.

Mainland Chinese buyers were also in the mix. They have been driving prices for both raw land and new buildings to new highs in Hong Kong. Many of China's largest companies have not had a presence in Hong Kong, and will pay over the odds for naming rights or exclusive ownership of Hong Kong office skyscrapers.

Mainland companies accounted for 56% of all new office leasing in April, according to commercial property brokerage Jones Lang LaSalle (JLL) . The vacancy rate in Central is a negligible 1.7%, and just 0.6% for top-end space.

Rather than pure margin profitability, Chinese developers and large companies alike are also eager to shift money denominated in the depreciating Chinese yuan into the U.S. dollar-pegged Hong Kong dollar, which is strong. 

There's also the benefit of getting money out of China and beyond Beijing's grasp. Chinese companies also see the value in learning international construction standards and operating procedures to apply back home, where real estate has traditionally been shoddily built and essentially left to fall down once completed. 

Although financial firms from the mainland have been the largest buyers of Hong Kong space combined, companies from a hodgepodge of industries have invested in space here. Chinese conglomerates are never known for the predictability of their expansion plans, which frequently take them into businesses totally unrelated to their core expertise. 

The HNA Group, the parent of Hainan Airlines and subsidiaries in many other industries, recently bought four residential plots at Hong Kong's old airport, Kai Tak, which will have a major redevelopment. It has spent HK$27.2 billion ($3.5 billion) for the privilege to take part.

A joint venture involving the mainland developers KWG Property HK:1813 and Longfor Properties (LGFRY) this week spent HK$7.2 billion ($920,000) on another Kai Tak plot, 15% over appraisers' estimates. Standard & Poor's then downgraded KWG's debt, saying its land acquisitions "have turned more aggressive than we expected."

KWG already bought another residential plot in conjunction with Logan Property Holdings HK:3380, but in Hong Kong's Ap Lei Chau, or "duck's tongue," peninsula. That fetched HK$16.9 billion ($2.2 billion) -- at the time a record lump sum for a government property sale in the city.

China Life Insurance (LFC) paid HK$5.85 billion for a building in Hung Hom, newly connected on the city's subway system, two years ago. China Evergrande, the extremely highly leveraged property developer, shelled out HK$12.5 billion on a building in Wan Chai, one of the city's secondary office markets.

The price Henderson paid was above the estimates of HK$14 billion to HK$22 billion. It also equates to just more than HK$50,000 ($6,400) per square foot.

It's the first significant plot of commercial land to come on the market in Central in two decades, since the British handed Hong Kong back to the Chinese in 1997. That and its large size, with a gross floor area of 465,000 square feet, make it exceptional.

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