Factors affecting developer’s profit of residential development projects in Hong Kong

Abstract

This study elucidated the major determinants of residential development projects in Hong Kong. Contrary to previous studies which examined key profit factors of real estate developments at country and company levels due to the difficulty in data collection, this study analyzed developer’s profit at project level. In total, 134 residential development projects on land sold by Hong Kong government from 2000 to 2021 were reviewed in this study. 13 key factors were identified, and subsequently classified into 3 major aspects, namely i) site characteristics, ii) development parameters, and iii) nature of the real estate companies. Empirical results from multiple regression models demonstrated that geographic locations played an important role as far as site characteristics are concerned: Projects on Hong Kong Island had the highest profit rate compared to that in Kowloon and New Territories, which had on average 71% and 78% lower profit rate respectively compared to the former. Projects near Mass Transit Railway (MTR) stations could earn 29% more than those that were not. The scale of projects was also a determinant for profit rate: Gross Floor Area (GFA) and plot ratio, surprisingly, showed a negative relationship with the profit rate, while the number of flats showed a positive relationship. Different disposal types of land also affected developer’s profit: Sites sold by tenders had on average 36% lower profit rate than that by auctions. Market sentiments also played an important role: Projects with land acquired during upturns were 91% less profitable than those acquired during market downturns, while projects with premises sold during market blooming had a 36% higher profit rate than those sold during market downturns. Competition negatively associated with developer’s profit: For every competitor introduced, developer’s profit was reduced by 1%. Joint developments jetted up profit rate by 40%, likely due to complementary expertise and risk-sharing. Mainland developers earned 47% less than local developers, which was potentially attributable to the lack of experience and aggressive land bidding strategy.