Fierce auction seen as Hong Kong property heats up

[HenryTo]

HONG KONG, Feb 18 (Reuters) - Hong Kong's first auction of land for commercial use in three years is expected to attract fierce competition among developers on Tuesday as they scramble to buy sites to cash in on a property market revival.

The strength of bidding will provide a good indication of the level of confidence in a market where property values have already climbed 55 percent since a mid-2003 slump, when an outbreak of the SARS respiratory disease ravaged the economy.

A high auction price would also boost the coffers of a government that has run a fiscal deficit for the last four years but which resumed land sales for residential development in 2004 after a moratorium to help cushion the fall in property prices.

If the land goes for far above the asking price of HK$608 million ($78 million), as analysts expect, investors could well be encouraged to buy into property stocks, which have moved in near perfect tandem with property values since mid-2000.

Shares in Kerry Properties and Sino Land , which have land close to the auction site, could be lifted by a strong sale price, and DBS Vickers analyst Winnie Chiu expects both companies to bid strongly.

"The competition will be very intense, especially from those mid-sized developers which weren't very successful in replenishing their land banks before," Chiu said.

The 4,715 square metre plot in Kowloon Bay, which is likely to be developed for offices, will fetch at least 30 percent more than the asking price -- anything between HK$792 million and HK$1 billion -- according to four analysts polled by Reuters.

A high price would also reflect well on Hong Kong's biggest developer by market capitalisation, Sun Hung Kai Properties , because it stocked up on land cheaply a couple of years ago.

But many analysts say most Hong Kong property stocks are fully priced, with better bargains available among smaller Asian developers in markets such as Thailand and Malaysia.

"We think they've already had a good run," said JP Morgan analyst Raymond Ngai, who said he liked Sino Land best as it had bought land cheaply and because any property rebound would have a relatively bigger impact on a smallish firm.

RISING MARKET

Hong Kong's notoriously sentiment-driven property market has been buoyed in the last year by hopes an economic agreement with Beijing and a flood of mainland Chinese tourists will boost the city's income.

A model used by Deutsche Bank analyst Alan Kwok, which takes forecast economic growth and interest rates into account, projects another 16 percent rise in property prices in 2005.

And the property recovery has fed directly back into higher consumer confidence in the crowded city.

Two weeks ago a house on the Peak, Hong Kong's most prestigious address with spectacular views of the city's harbour, was sold for $55 million, making it the most expensive residence sold since the 1997 Asian financial crisis.

Hong Kong saw strong retail sales over the Chinese Lunar New Year holiday earlier this month, prompting analysts to predict landlords will put up rents on shops by as much as 20 percent this year.

Office leases, typically negotiated for three-year periods, are also likely to start catching up with the rise in property values over the last year.

Analysts say office rents will rise 30 percent this year, an encouraging prediction for the tycoons who will gather to bid on Tuesday.

"There hasn't been much new medium grade office supply in the market, and there is demand for it," said Simon Lo at Colliers International.

The market price for office space in Kowloon Bay is around HK$3,200 per square foot, but should rise to HK4,000 by the time any office building, possibly combined with retail, is completed on the site in two years time, according to property consultants.

That is why most analysts believe the auction will go the same way as last year's sales of residential sites, when cash-rich Chueng Kong Holdings and Sun Hung Kai paid 60 percent or more above the initial bids.

Land sales, historically a key source of government revenue, have raked in about HK$18.1 billion (US$2.32 billion) in fiscal 2004/05, prompting some analysts to predict Hong Kong could balance its books ahead of the targetted 2008/09 fiscal year. ($1=7.799 Hong Kong Dollar)