Developers use forced auctions to snap up Hong Kong's older buildings for redevelopment amid city's land shortage

By Lam Ka-sing kasing.lam@scmp.com / https://www.scmp.com/business/article/3085340/developers-use-forced-auctions-snap-hong-kongs-older-buildings?utm_medium=partner&utm_campaign=contentexchange&utm_source=EdgeProp&utm_content=3085340 | May 26, 2020 11:22 AM SGT
Some of Hong Kong's ageing residential buildings are being snapped up for redevelopment through compulsory purchase orders amid a shortage of land in the city.
Billionaire Edwin Leong's Tai Hung Fai Enterprise bought a 61-year old building in Sai Ying Pun while Hip Shing Hong acquired another old building in Shau Kei Wan on Wednesday.
Both buildings were worth HK$700 million (US$90.32 million) and were bought under the Land (Compulsory Sale for Redevelopment) Ordinance. The law enables developers to force a compulsory auction to buy the remaining stake of a building, if it is over 50 years old and they already owns 80 per cent.
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The number of such forced sales will rise in the coming months as courts resume operations after closing during the coronavirus outbreak, said Alnwick Chan, executive director and head of valuation and professional services at Knight Frank, which is helping with applications for three compulsory sales in the next three months.
The compulsory auction for the On Hing Building in Sai Ying Pun, about 10 minutes' walk from the University of Hong Kong, had a reserve price of HK$700 million. The company has spent years acquiring 91 per cent ownership of the nine-storey commercial and residential building.
Tai Hung Fai pushed ahead with the project despite the gloomy state of the property market because "construction takes several years", and therefore things should have improved by the time redevelopment is complete, said Edwin Leong, founder and chairman of the developer.
It is likely to be redeveloped into a 28-storey block of between 100 and 200 flats measuring 300 to 400 square feet, with shops at the bottom, Leong said.
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He said the cost of redevelopment could be "several hundred million" less than getting land through government tender, what he called "the return for the effort".
If it had been a regular parcel of land sold via tender, he estimated it would have been worth about HK$1 billion. The finished product, several years later, could be worth about HK$1.5 billion.
As his company is not listed, it has an advantage in spending more time and effort buying old buildings because it is not under as much pressure from shareholders to increase turnover "like factories" and regularly report results, he said.
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Leong criticised the government for the slow and complicated approval process for constructing buildings.
It can be a long, painful process for a developer to slowly buy up their 80 per cent stake to trigger a compulsory sale of a building, as individuals like shop owners hold out for higher offers.
"As the market turned [for the worse], some small street shop owners have become more flexible with their asking prices," said Chan. "When the market was good, the prices they asked for would be higher. But shops are those most affected by the pandemic. It is easier to make offers."
Notably, award-winning actor Tony Leung may suffer a loss of HK$6.61 million as his street-level shop in an old building in To Kwa Wan is in the firing line of a compulsory order sought by investors related to Pong Yuen Group, the building's majority owner. The latest valuation of the 700 sq ft shop was HK$8.39 million, 44 per cent lower than the HK$15 million Leung paid in December 2013.
Chan expects the number of compulsory sales this year to be between 20 and 30, compared with 37 last year and 39 in 2018, as some cases have been delayed by the suspension of courts during the pandemic. Uncertain market prospects have also dampened some developers' appetite for redevelopment.
Hip Shing Hong (Holdings) Company completed its purchase of the Yee Tak Building for a total HK$700 million through a compulsory auction on Wednesday.
Henderson Land Development, which is very active in redevelopment, also recently applied for compulsory auctions for old buildings at 177 to 191 Tai Kok Tsui Road in western Kowloon. The plan is to yield about 200 flats as phase seven of the Square Mile project.
Investor Alexander Law Sau-wang's CTL Group also applied for compulsory auctions at 181 and 183 Temple Street.
 
 
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