Hong Kong developers have been bidding more cautiously at government land sales because of concerns over rising construction costs, according to Swire Properties Ltd.

The decline in land prices "have much to do with developers seeing the cost of construction rising very quickly," Martin Cubbon, chief executive officer of the real estate unit of Swire Pacific Ltd, the biggest commercial landlord in Hong Kong's Island East district, said in an interview on Thursday. "There's impact on margin. Therefore the value betted on land must go down."

The Hong Kong government, which is boosting the supply of land to try to curb a more than 70 percent surge in home prices since early 2009, has sold three sites since early August that missed estimates.

Hong Kong is the second-costliest market for construction in Asia, according to the 2011 International Construction Cost Report by EC Harris.

A group including Sino Land Co and Kerry Properties Ltd in August bought a site with the only bid in a government land auction. Sun Hung Kai Properties Ltd and Cheung Kong Holdings Ltd, the city's two biggest builders, were two of the only three bidders competing for the parcel sold in this week's auction.

Cubbon's remark provides an alternative explanation to the tepid responses of developers in recent land sales. Some analysts and surveyors have blamed government measures, increasing land supply and uncertainty in the global economy for the lukewarm responses of developers.

Transactions in the residential market have slowed since June, when the government lowered the loan-to-value (LTV) ratio for home mortgages to cool the red-hot property market. The LTV is the percentage of a property's value that is mortgaged. Sellers have also lowered the asking prices for their residential properties in recent weeks, a sign that the residential market is cooling down.

But the Swire Properties CEO expects luxury residential property prices to be stable.

"Most of the expectation is stability in pricing for luxury property," said Cubbon.

"I don't see any sign of distressed sellers, before any correction there's distressed sales. And I can't see what are the circumstances out there that will bring the stress, especially in Hong Kong," he said.

Swire is aiming to complete a luxury residential project in the exclusive Peak district next year. Swire intends to own the development, which is a 12-storey building with 12 residences of around 6,000 square feet each.

Bloomberg - Reuters

(HK Edition 09/09/2011 page2)