5 July 2018
The scarcity of land supply in Hong Kong is a persisting issue, with supply generally lagging behind the demand. With mid-size and foreign developers gaining considerable market presence, Hong Kong’s pool of developers is progressively expanding beyond local conglomerates, fuelling an intense period of competition and record setting transactions in the city’s real estate market. Since 2016, cash-rich mainland property companies have muscled their way into an already crowded market by taking up land at exceptionally high premiums in land auctions. During 2017, 20 government sites were transacted, 30% of which were acquired by mainland developers, while also successfully acquiring 60% of all residential governments sites available within the same year.
In 2018, with the tightening capital inflow from PRC developers, Hong Kong developers regained some market share by taking government tender sites. During April, a government residential site in Tsing Yi had received 25 bidders, eventually a Hong Kong based medium sized developer, Wang On Group, won the tender at HKD867 million – reflecting the keen competitiveness for prime residential sites in Hong Kong. A month later, blue-chip developer Sun Hung Kai Properties, successfully acquired the government site at Kai Tak at a price of HKD25.16 billion, breaking the historical record for highest lump sum price for a residential land tender in Hong Kong.
With strong competition in the public land sale market and as local property developers are priced out of land auctions, developers are now setting their sights on acquiring old properties for redevelopment.
Collective sales in Hong Kong
Unlike acquiring land in the public sector, engaging in a redevelopment project in the private sector via collective sales require lengthy procedures which do not happen overnight. It takes time to identify a potential redevelopment site, one has to align the interests of all stakeholders and perform the due diligence on the title deeds – all of which are complex processes that depend on precarious negotiations. Nonetheless, while collective sales are viewed as the most time-consuming, resource-intensive path to a new development project they are also deemed as a necessary step in growing one’s footprint in today’s Hong Kong market.
To claim full ownership of a redevelopment site, a developer must secure a specified majority ownership, known as undivided shares, of the existing property occupying the lot. The developer holding a majority of the lot can then make an application to the Lands Tribunal for a compulsory sale, essentially a forced auction to buy out the rest of the ownership. Since the introduction of the Land (Compulsory Sale for Redevelopment) Ordinance. (Cap.545 of Laws of Hong Kong) in 1999, the statutory threshold for a compulsory sale is 90% of undivided shares of a property. The first successful example since the enactment of this ordinance was Fortune Villa at 4-22 Alnwick Road Kowloon Tong, where Cheung Kong Holdings acquired 100% ownership via a compulsory sale order after acquiring 92% through a collective sale arranged by Colliers International in December 2004.
In April 2010, the Government further relaxed the ordinance, under Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice (Cap. 545A of Laws of Hong Kong), lowering the compulsory sale application threshold from 90% to 80%. The prerequisites include: a lot and its individual units must represent more than 10% of all the undivided shares on the specified lot; if a lot is not located within an industrial zone, any industrial building on that lot must be at least 30 years old; or any lot in which all buildings are 50 years or older.
Collective sales have gained more and more popularity, especially with developers who don’t have deep enough pockets to bid against larger players in the public land sale market. Ideally, developers will target to amass at least 80% ownership through one transaction, saving them time and effort, while minimising uncertainty on the overall possibility of reaching the threshold. Alternatively, some speculative purchasers will opt to settle with more than 20% ownership, a significant majority over individual owners and enough to influence the prospects of the lot.
The concept of a collective sale is welcomed by property owners, as relaxing the threshold creates new opportunities in entertaining a collective sale. Instead of waiting for prospective buyers to approach, savvy owners can begin discussions around the feasibility of a collective sale once their building has crossed the 40-year-old mark. Their motivations behind engaging in the lengthy processes of a collective sale is to fetch a higher price than what they would generally receive by selling in the second-hand market. Premium developers can afford and are willing to incentivise owners with over-market prices, especially for those sites with unutilized plot ratios.
There are many successful case studies in which developers acquired valuable sites in urban areas through collective sales.
Recently Easyknit Group acquired a basket of ownership in several old buildings situated in Chatham Road North, To Kwa Wan, including nos. 470 with 100% ownership, and 472, 474, 476 and 478 which range between 82.14% to 85.71% ownership – rendering the eligibility to apply for a compulsory sale. Once consolidated, the site amounts to 4,685 sq. ft., boasting a maximum developable area of 42,165 sq. ft. for residential usage.
Last month, Rykadan Capital Limited acquired 85% ownership of Jaffe Mansion located at 216-222 Jaffe Road Wan Chai. With a building age of 53 years, Rykadan Capital can apply for a compulsory sale. Since town planning designated usage for this lot as commercial, there is a possibility the redevelopment could be a retail or office building. The site is in a prime area of Wanchai and will benefit from the future Exhibition Centre MTR station linking Shatin to Central. For developers it is a challenge to acquire a site like this one, unless it’s done via a collective sale.
The key success factors for a collective sale
There are a few success factors for a collective sale transaction to be completed. The unity of the individual owners should be regarded as the most important factor. Developers are willing to pay more for a higher ownership percentage in an acquisition. Owning 100% would attract a higher premium over owning 80% of a site. Thus, owners must align their interests towards a ‘win-win’ situation for all parties. The distribution of the sale proceed is always a controversial topic in a collective sale. The owners should agree in advance for the distribution before selling their ownerships in the market. There are different scientific methods to determine the distribution, such as: using undivided shares, saleable areas, rateable values, existing use values, etc. Still, none of the above are perfect methods for everyone, occasionally owners must compromise and place the benefit of the whole as the top priority rather than considering his or her own individual interests.
Secondly, it is advised to appoint a taskforce or committee among the owners to drive the collective sale process. The committee members need to be proactive and spend time organizing the process which includes regular meetings, interviewing agents and consultants, etc.
Lastly, selection of the right agent as well as the sale method is critical to a smooth process and successful sale. As collective sales normally involve several vendors, it is important to select a single representative or property agent to act on behalf of all vendors. An experienced agent can provide tailored advice and value-added services to any sale. Considering the success cases, public tenders would be a good method of sale as they provide high levels of transparency and fairness, balancing the interests of all owners. A public tender process, ensures every Hong Kong or PRC developer is aware of the sale of the project, enabling them to make an aggressive bid on acquiring a site.