Company Update: Benefits from the standardization of land premium assessment for land exchange in Fanling North
Henderson Land continues to expand its farmland reserves. As of Dec-21, the company boasted of a sizeable agricultural land reserve of c.44.9msf in terms of attributable area. This makes the company the largest agricultural land holder among all property developers in Hong Kong.
By geography, Yuen Long and North District account for 57% and 27% of Henderson Land’s total attributable agricultural land area. In other words, about 84% of its farmland is in the Northern Metropolis area. This makes the company among the key beneficiaries of the development of the North Metropolis.
The company has strong exposure in Fanling North and Kwu Tung North New Development Areas (NDAs). In late 2017, Henderson Land converted two plots of agricultural land, one in Fanling North and the other in Kwu Tung North, into residential use following the payment of land premium.
Currently, Henderson Land holds 1.38msf of land in these two NDAs. Among these, the applications of in-situ Land exchange for three separate lots with a combined land area of over 600,000sf have been approved by the government. Subject to the finalisation of land premium, these land plots will provide total combined GFA of 3.47msf including 3.03msf for residential use and 0.44msf for retail purpose.
In Oct-21, the government announced to implement the standardisation of land premium assessment to expedite farmland conversion in the Policy Address.
In late March, the land premium assessment using standard rates would first apply to those in-situ land exchange applications in Kwu Tung North and Fanling North NDAs.
For Kwu Tung North and Fanling North NDA, standard rates are HK$5,574psf and HK$5,110psf for residential use after land exchange (or HK$3,252psf and HK$2,787psf for non-residential use) on GFA basis. The standard rates for agricultural land before land exchange in the two NDAs are HK$372psf on a site area basis. These rates are valid up to Jun-23.
Land premium assessed based on these standard rates should be higher than those for agricultural land conversion by Henderson Land in these two NDAs in late17. We note that the standard rates compare favourably with land prices for three residential sites in the area sold via government tenders in 2021.
Currently, the government has accepted in-situ land exchange applications for six plots in these two NDAs for further processing. These include three above-mentioned plots from Henderson Land. We believe Henderson Land will make use of this new scheme for land premium assessment, which in turn unlocks the hidden value of its farmland reserve.
If this scheme serves to speed up the conversion of farmland into residential/commercial use, we believe the government would consider extending the scheme to other NDAs such as Hung Shui Kiu in the medium term. Henderson Land holds total land area of c.6.4msf in Hung Shui Kiu NDA. To facilitate land resumption progress, the Hong Kong government has enhanced the ex-gratia compensation for landowners, effective 3 May. The existing four-tier zonal system will be streamlined to a two-tier zonal system, with rates reviewed every six months. Under the new arrangement, agricultural land with development purposes and non-development purposes will fall under the Tier 1 rate of HK$1,510psf and Tier 2 rate of HK$755psf respectively.
Under the two-tier Zonal System, owners of land resumed by the government for development uses outside NDAs will receive the same Tier One rate as in development projects within NDAs, representing a 60% increase over the Zone B rate normally receivable for development projects outside NDAs before the revision in compensation zones. Owners of land resumed for non-development uses will receive Tier Two rate, representing a 20% increase over the Zone C rate normally receivable for rural improvement works in the past. This could be positive for Henderson Land. In 2019-21, the government reclaimed a total land area of 2.03msf in Fanling North NDA, Kwu Tung North NDA, Hung Shui Kiu NDA, Kwu Tung South, Kam Tin, Tong Yan San Tsuen and Lam Tei for public use for HK$2.29bn in cash.
Henderson Land has been acquiring old tenement buildings primarily in urban areas for redevelopment. Currently, the company has urban redevelopment project clusters in Tai Kok Tsui, Hung Hom and Mid-levels. Recently, Henderson Land offered The Quinn. Square Mile in Tai Kok Tsui for presale. Market response has been satisfactory with 100 units sold for c.HK$660m. The Quinn. Square Mile will provide 614 units upon scheduled completion in 2024. Total GFA is 242,518sf including 202,147sf for residential use and 40,371sf for retail purpose. This marked the company’s fourth residential redevelopment project in the neighbourhood. Elsewhere, Henderson Land will also redevelop another project nearby at 39-53 Tai Kok Tsui Road (0.39msf) which should go on pre-sale in 2023.
The Hung Hom cluster is branded as Baker Circle which has a combined GFA of 1.03msf including 0.87msf for residential use and 0.17msf for retail purpose. Total number of residential units that can be built reaches about 2,800. The entire project is scheduled for completion in 2027.
Henderson Land plans to pre-sell three projects there with aggregate GFA of 0.33msf in 2022. Over 880 units are being built on these three sites with targeted completions in 1H24. Based on our estimated ASP of HK$23,000psf for the residential portion, we estimate pre-tax development margins of >30%. We see this redevelopment cluster as a key development profit contributor in the medium term.
The Mid-level cluster spans attributable GFA of 0.7msf. The bulk stems from 4A-4P Seymour Road which offers 172 units in two residential towers with GFA of 472,077sf. Henderson Land owns 65% stake in this redevelopment with the balance held by New World Development. Superstructure works are currently underway with phased completions in 2Q23 and 3Q23. Given low land costs, this redevelopment is a profit bonanza. We estimate pre-tax earnings attributable to the company to exceed HK$5bn.
Henderson Land has consolidated the ownership of buildings at 88 Robinson Road, 94-100 Robinson Road and 105 Robinson Road in Mid-levels for redevelopment.
The stock is trading at a 54% discount to our appraised current NAV. Valuation is inexpensive. Any positive news flow on agricultural land conversion should improve the sentiment towards the counter. By assigning a 50% discount to our Dec-2022 NAV estimate, we set our TP at HK$40.90. Maintain BUY.