Takeaways from Northern Metropolis tour

  • Investors who participated our tour are positive on the property market in N.T. given the government ambitious plan, and N.T.’s high connectivity with China.
  • Our expert guest from Midland sees a faster development cycle for farmland conversion, and expects home prices in N.T. to outperform the rest of HK.
  • We estimate farmland projects to enjoy high profit margins of 30-35%. HLD, SHKP, NWD and CKA are the largest farmland owners by site area.
  • We estimate 25%/16%/11% GAV enhancement for HLD/SHKP/NWD should their farmland be fully converted. They are also our preferred HK developers.

We organised a tour visiting key districts of Northern Metropolis

We hosted a Northern Metropolis tour last Friday; 20 investors participated. We visited a few districts in the New Territories (N.T.), which HK Chief Executive has outlined proposal plans for, to reshape the area into the Northern Metropolis (NM) over the next 10-20 years. Our tour started at Hung Shui Kiu (northwest of N.T.), moved on to Tin Shui Wai (close to west of Shenzhen(SZ), Yuen Long and Kwu Tong (close to Futian, SZ), and then to Heung Yuen Wai border, southeast of SZ. We also visited a farmland-converted project in Fanling.

Grand plans with deeper integration with Greater Bay area

Based on HKSAR Government’s plan, the development of NM will grow its population to an estimated 2.5m in 20 years (from 955k currently) occupying over 900k residential units – 70% from public housing (including subsidised housing) and 30% private. An additional 530k jobs will be created, to support the designated economic roles of each of NM districts, and its deeper connectivity with cities in the Greater Bay Area (GBA), such as Shenzhen.

Midland expects residential prices in NT to outperform

Our expert speaker on city planning from Midland said that the HKSAR Government has increased the plot ratio of residential projects significantly to boost flat supply, and noted the government’s strong intention to streamline its internal processes to improve the execution of its projects. Given a more positive outlook and high connectivity with China, Midland expects private housing prices in the N.T. to outperform the rest of HK by 3-5% in the next 6-12 months.

Developers making lucrative margin from farmland conversion

We visited three projects (by SHKP, HLD and CKA) converted from farmland or built on land won from tenders. We estimate that these projects enjoy lucrative operating margins of 30-35%. We believe developers with rich farmland reserves such as SHKP, HLD, NWD and CKA will be key beneficiaries of HKSAR Government’s faster approval for farmland conversion ahead. Full conversion of their farmland will enhance their gross asset value (GAV) by 5-25%, in our estimate.

Prefer HK developers to landlords; top picks: SHKP, HLD and NWD

Maintain sector Neutral, with preference for developers over landlords in view of the strong genuine demand for residential flats amid limited supply over the foreseeable future. SHKP and HLD are the two biggest beneficiaries given their huge farmland reserve and strong execution. We also like NWD for its decent exposure in farmland in the N.T. A key downside risk for the sector is a prolonged Covid-19 outbreak, while relaxation of tightening measures in HK property market is an upside risk.