Land Pricing in Evaluating the

Land Pricing In evaluating the value of the Chengdu parcel and whether or not to bid more, Hang Lung must consider some key points. The first is that it traditionally extracts 2-3 times more rent than its competitors. That there is somebody willing to pay more calls into question Hang Lung's assumptions about the value of the Chengdu land.

Another consideration is that land costs are a low percentage of total project cost, so getting the land at a rock bottom price is not necessary for the profitability of the project. Land values are escalating rapidly, so the rival bidder may be investing in the land, rather than buying it for development. This could explain why the rival has arrived at an unexpected valuation for the land. For Hang Lung, the value is strictly based on the company's ability to develop it.

There are a number of assumptions built into the figures. The comparable net revenue per square foot is reasonable, because three projects have that figure. Chengdu is a major city on a par with a Shenyan, Tianjin or Dalian. The smaller provincial cities like Jinan and Wuxi are not necessarily a close comparable. Of the properties listed, Tianjin is probably the closest comparable in terms of its size and wealth.

While larger projects (Wuxi, Shenyang Forum 66) have lower costs per square foot, the Chengdu project is city center, in an area already established for this use. The leasable area to GFA ratio is estimated to be 75%, in between the two comparables (Wuxi and Forum 66). The cap rate chosen is 7.5%, in the middle of the range for the industry. The land price is estimated to be 30% of the total project cost. This is based on the close comparables (Palace 66 and Dalian, which are also used as comparables on the revenue side).

The spreadsheet output with the estimated land value of the property is: Value of Land GFA 4,720,000.00 Leasable area (75%) 3,540,000.00 Occupancy (80%) 2,832,000.00 Gross Rental Rev, 1st year, sq ft Net rental rev / sq ft (75%) Net rental revenue (?) 669,060,000 Cap rate 0.075 All in cost 8,920,800,000 Land price estimate (30%) 2,676,240,000 This gives a return in the first year of 7.5%, which is higher than on the other HLP projects -- these range from 5.7% to 6.7%. The calculation is highly sensitive to the rent.

If rents are at the low end (similar to Wuxi and Shenyan 66, the other two massive projects) then the value of the property is around? 1.44 billion, roughly 46% lower than the current estimate. If rents are at Jinan levels, then the value of the property is around ?2.2 billion. HLP needs to feel comfortable with the high-end revenue estimate.

Given the strong economic growth in Chengdu and its status as a major regional center not only in heavily-populated Sichuan but as the largest city in the country's western regions, there is reason for optimism.