Hong Kong property tycoons are selling super call options

(Bloomberg Opinion) — Do people view residential property as a utility or an investment? Hong Kong property tycoons are racing to find out.

Consider Uptown East in Kowloon Bay, developed by Wong Sun Hing Limited. Its latest pre-sales pitch includes a so-called “Super Flex Stage Payment Plan”, where buyers will only have to pay a 5% deposit, with the rest expected to be completed in 2025. This payment plan was not available earlier this month. Last week, Wong Sun Hing and its partner New World Development Co. sold 50 of the latest 132 units offered in the first 30 minutes. A recent survey by Bloomberg Intelligence shows that more than half of Hong Kong home buyers may accelerate their purchase plans due to fear of rising prices.

Wong Sun Hing is essentially writing call options for those who want exposure to the upside. After all, home prices have fallen roughly 25% since their 2021 highs. The average selling price of Uptown East’s first batch of units was HK$14,808 ($1,893) per square foot, or 31% lower than an adjacent complex nearby, which went on sale in December 2021.

This type of transaction works for both parties. The developers are in a hurry. They need to capture this golden sales window that has been created after the government completely lifts the decade-long home buying restrictions at the end of February. Its purpose is to show banks that their projects can still be sold, so that panicked lenders do not pull loans. Meanwhile, if the city’s property market does not improve in a year’s time, buyers may simply walk away, and builders will be able to keep the forfeited deposits and thus reduce their cost basis. .

Since the future of the city is still uncertain, Hong Kong developers need to be aggressive. It may also mean implementing sales strategies that don’t make sense from an operating cash flow perspective. Last week, Victor Lee’s CK Asset Holdings Ltd. reported a sharp decline in 2023 profits and cut its dividend by 10%, with the son of superman Li Ka-shing warning that Hong Kong is losing its position as a global financial center. The position achieved through hard work should not be lost. Across town, Adrian Cheng’s New World Development lost 29% of its market value this year as concerns persist over its high debt ratio.

As far as investors are concerned, it was a 20-fold preparation in the case of Uptown East to test an important market where liquidity and transparency had eroded over time due to previous government policies. Even without counting mainlanders, there are about 184,000 non-permanent residents in Hong Kong who can now buy apartments without paying extra stamp duty, according to Morgan Stanley. Among existing residents, about 408,000 have assets worth more than HK$10 million and can buy a second home as an investment – ​​without any additional tax burden. About two-thirds of homes in the city are mortgage-free. Buying call options is the best way to explore this type of blue-sky scenario.

This perhaps explains the reasoning behind some of the strange deals in recent weeks. A buyer snapped up all 24 units put up for sale at Henderson Land Development Company’s Belgravia Place project for more than HK$166 million. This pre-sales step allows investors to delay 90% payment until delivery.

So far, this month’s primary sales seem to indicate a sizable portion of investment demand. Last weekend, Wheelock Properties Limited sold its entire first batch of 368 units on offer, with investors taking up a fifth of the total. Apparently, people in Hong Kong don’t quite agree with President Xi Jinping’s mantra of staying in housing, not speculating.

Ultimately, this phenomenon is caused by the lack of money management options for the middle class in the city. There are hundreds of thousands of micro-millionaires in Hong Kong who are ignored by private bankers. As such, people are turning to physical assets instead. Hong Kong’s billionaire developers should get some relief.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. He is a CFA charterholder.

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