Hong Kong property tycoons are selling super call options

Shuli Ren, Bloomberg

Do people see residential property as a utility or an investment? Hong Kong’s property tycoons are racing to find out.

Consider Uptown East in Kowloon Bay, developed by Wong Sun Hing Ltd. Its latest pre-sales pitch included a so-called “super flex stage payment plan”, where buyers only need to put down 5% deposit, with the rest to be paid upon completion, expected 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 on offer in the first 30 minutes. A recent survey by Bloomberg Intelligence shows that more than half of Hong Kong’s home buyers could accelerate their purchase plans over fears of price hikes.

Wong Sun Hing is essentially writing a call option to those who want upside exposures. After all, home prices have broadly dropped by 25% since their 2021 high. 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 up for sale in December 2021.

This kind of transaction works for both sides. Developers are in a hurry. They need to capture this golden sales window, created by the government’s complete removal of its decade-long home purchase restrictions late February. The aim is to show banks that their projects can still sell, so nervous lenders do not pull loans. Meanwhile, if the city’s property market doesn’t rebound in a year’s time, buyers can simply walk away, and builders will be able to keep the forfeited deposits and thereby lower their cost base.

With the city’s future still uncertain, Hong Kong’s developers need to be aggressive. That can even mean deploying sales tactics that do not make sense from an operating cash flow perspective.

As for investors, it was a leveraged play — 20 times gearing in Uptown East’s case — to test out an important market where liquidity and transparency were drained over time by the government’s past policies. According to Morgan Stanley, even without counting those from the mainland, there are around 184,000 non-permanent residents in Hong Kong who can now purchase apartments without paying extra stamp duty. Among existing residents, about 408,000 have wealth above HK$10 million and could buy a second home — with no additional tax burden — as an investment. About two-thirds of the city’s households are mortgage-free. Buying a call option is thus the best way to explore this kind of blue-sky scenario.

This perhaps explains the logic behind some of the seemingly outlandish deals in recent weeks. A buyer bought all 24 units put up for sale at Henderson Land Development Co.’s Belgravia Place project for more than HK$166 million. This pre-sales move allows investors to delay 90% of payments until delivery.

So far, primary sales this month seem to indicate a sizable chunk of investment demand. Last weekend, Wheelock Properties Ltd. sold out its entire first batch of 368 units on offer, with investors taking up one-fifth of the total. Apparently, people in Hong Kong don’t quite agree with President Xi Jinping’s mantra that housing is to be lived in, not speculated upon.

Ultimately, this phenomenon goes down to the city’s lack of wealth management options for the middle class. Hong Kong has hundreds of thousands of mini-millionaires that private bankers ignore. As such, people are going for physical assets instead. Hong Kong’s billionaire developers must be somewhat relieved. [Abridged]

Courtesy Bloomberg/Shuli Ren