Management Essay

Management: Development Appraisal Report


Hong Kong is a small island located at the mouth of Pearl River Delta on the southern coast of China. The town borders the city of Shenzian to the north that is in Guangdong province. The city is encircled by the South China Sea that touches it from three sides. Hong Kong is believed to have an approximated population of 7.155 million people (Cheung, 2013). That is according estimates of statistics released in the year 2013. Typically, the ever rising growth of Hong Kong is believed to have been influenced by technological advancements that are up to date, industrialization, and good infrastructures (Cheung, 2013).

This paper will conduct a comprehensive study for appraisal of a site in Hong Kong-Tung Chung Town Lot No. 38. The site is estimated to sit on an area Land of 1.2902 hectares. It is suitable for the establishment of a commercial building such as a hotel (Cheung, 2013). While doing so, the paper will look into the value of that site, financial appraisal, price and the risks pertained to the purchase and development of this site.

Executive Summary

After a series of discussions and considerations the company found it important to locate a site within Hong Kong for development purposes.

The site is was to have a great potential to attract visitors locally and abroad to reside and receive services provided on that site. The management articulated or preferred the site to be used for commercial purposes considering the fact that Hong Kong had a high pollution and was a business center (Li, 2012). Additionally, the city was a home for many government officials who preferred it because of it tight security recreation facilities and good infrastructures. It was also a tourist destination maybe because of it being and island and bordering a sea that had beaches. The project was to realize a substantial amount of profit to payback the expenses incurred during the development, and was also to increase in value in years that followed considering that the management might opt to sell the site later in the future (Vittachi, 2013).

Catchment Area

Now that the area is encircled by the sea to the north and it is at the mouth of River Pearl it will form a catchment area for tourists locally and overseas who will be coming in the area to indulge in recreation services such as swimming, fishing and to speed boat in the waters. The best bit of this region is that it has a large population and members of the community around this area will find their way there while seeking for some services. For instance, students from the nearest school will be customers of dishes offered in the hotel (Li, 2012). Teachers too will occupy the same hotel for residential purposes. That will also include doctors and nurses in the region attending patients at hospitals in within a close proximity. Lastly, the site will also become a catchment area for travellers passing by the region while going to other cities.

That will be motivated by the fact that the site is at a crossroad leading to various towns (Vittachi, 2013).

Site Context

The area occupies 12906 meters per square to be specific, it is bordered by several main roads on the west, south and north part of it, and these roads are in exemplary good condition giving it an upper hand from other cities that are surrounded by roads full of pot holes (Cheung, 2013). As a result of being close to river Pearl, the site is endowed with ample fresh water that is available all day and night. Access to electricity has also been ensured with sufficient street lamps that are in good condition to ensure tight security at night (Cheung, 2013). The issue on security has also been catered for through establishing several police stations to maintain security and order in the region. Being a technological center, the region around this site has incorporated various automated machines such as traffic robots to control movement of vehicles in the city and automated teller machines in banks that are active all day and night. Considering the high value of land around this region, the site is estimated to attract an average amount of $ 844 million. That is according to the recent trend of prices in the region (Li, 2012).

Overview of Active Developments

There is indeed a high number of active developments taking place in Hong Kong. That is according to report released by a government sales agency on September 5 2014. These developments were highly concentrated along the coast region and involved commercial buildings such as a petrol station and hotels (Fung & Lee, 2014).

Active Sites with Reported Sales

The active sites appearing on the government tender sale did not provide a precise value the sites were supposed to attract. However, they gave a close estimation welcoming interested individuals to make proposals. The proposals were to be made through government offices of land department. However, the report indicated that those who were fast to make the proposals could benefit from government grants and discounts. Examples of these sites include 779 Lai Chi Kok estimated sale of $ 800 million, it was to be used as a petrol filling station. Wong Nai Chung comes next with an estimated value of $ 798 million. It was also to be used as a petrol filling station and 3 Wong Chuk Hang going for $ 833 million just to mention but a few (Cheung, 2013). From these examples, it can be deduced that, the value of land stands at very high prices in this region and goes at almost the same price though the sale varies with the amount of size and closeness to the main road (Vittachi, 2013).

Mix of Housing on Active Sites

The manner in which houses are built in these active sites has adopted a system of incorporating too much commercial houses and little residential ones. Commercial building includes; hotels, supermarkets, banks, petrol stations just to mention but a few. Those providing residential purposes are hotels that have lodgings. However though, there are few apartments going for very high costs per month. According to a survey released just after the end of 2013, home prices were as high as HK$4.02 million, while an annual average household income called for HK$270,000. That was almost 15% of a home price (Vittachi, 2013).

New Build Sales Prices

The value of building in Hong Kong has significantly escalated over the last couple of years. The price is determined by factors such as location, design, and size. New houses attract very immense values that seem unattainable. In fact, Li Ka-Shing who is a prolific tycoon in China was quoted saying that the current prices of sites and building in Hong Kong deters purchases. New build sales prices are known to double, this is after considering factors like; the value of land they sit on, the expenses incurred during the building process and other activities defined by construction of that new building. For instance, an average land that was built at $ 844 million is known to be sold at a cost more than $ 1688 million upon completion (Fung & Lee, 2014).

New Build Sales Prices Per Sq Ft

While buying or selling any building, the size of that building must come in; the price is calculated in terms of per square foot. New build per square foot is now known to exceed HK$ 10,000 even in unglamorous regions such as Taikoo Shing in Hong Kong Island. About 700 square-foot units in this region costs more than $1 million apiece. The prices are going up every day with a modest 1200 square foot which is approximate 111 square meter building costing around $1.9 million (Raco & Gilliam, 2012).

Prices and Sales Volumes in the Local Re-Sale Market

It is already evident that the prices of built site as well as land that can be used for development stands considerably high. That can be attributed to the fact that demand for land is high in this region as a result of the high population and maybe as a result of the area being a recreational center which attracts diverse volume of people. As per the recent statistics released by the government lands department, the price of a build site that stood at $ 1 million per 700 square-foot units in this region in the year 2012 was likely to attract a cost rise of 50% of this amount at the strike of the year 2014 (Raco & Gilliam, 2012). That is why there are indeed many land auctioneers buying land and then selling it later after a certain period when its value has escalated.

Profile of Existing Housing Supply

The status of housing supply currently stands promising to the developers who have been fortunate to buy a site in this region and build houses for commercial or residential purposes. That is evident from the time an advertised vacant house appears online and the time it receives occupants (Fung & Lee, 2014). A certain auctioneer firm in Hong Kong boasts of selling an average of 300 houses each month where they even claim to have not been in a position to meet the respondents demand and they therefore had to wait for some of the houses under development process to be completed (Raco & Gilliam, 2012).

Education and Communication in Local Area

Now that the region is highly technological conscious, the means of communicating and educating people locally involves posting of advertisements online on already established sites. The advertisement is updated daily to incorporate those houses that have already undergone completion and those that have become vacant following shifting from those occupied them there before. Members of the region are also sensitized about these vacant houses on local channels on Televisions and radio stations. Billboards have also been enacted in streets providing descriptive information about the housing in this region (Cheung, 2013).

Profile of Demand in Local Area

As the situation stands, demand for the already developed houses is very high and this is expected to go up in the years to come. Potential customers as already evident are local people participating in various activities in the region, this are the like of government officials such as civil servants, engineers, nurses, doctors, teachers and students (Raco & Gilliam, 2012). Tourists are also part of the customers as they are fond of visiting the region for various reasons discussed earlier in this paper.

However, several issues might undermine the process of the company’s bid to acquire a development site in this region. For instance, governments plan are underway to control the prices of land in this region. That means that the company might not realize big profits after buying the site and deciding to sell it in feature when this government plan might have come into effect. Additionally, lots of people despite their level of wealth have been seen to deflect from housing in this region arguing that the value of life in this region is constantly increasing, and therefore negatively affecting their savings (Fung & Lee, 2014). If this will be the trend, then the future of developing houses for commercial purposes in this region is questionable.

Conclusion and Recommendation

From the case study already conducted of Hong Kong, the region is a full profit potential den. This can be attributed to the fact that, the prices of sites in the region are constant escalating due to the increasing demand for housing in the city. Though the government plan to control the sale of housing in this region might happen, it is not sufficient to affect the ever rising demand of land in this region. This is simply because people locally and all over the world are in great need to own a site in this region. Thus, it is optimistic that, the value of land will continue to escalate in the years to come.

It can be recommended that the Company’s Board takes full advantage of this situation and invest on buying Tung Chung Town Lot No. 38.

The site has already demonstrated full potential of making the company realize immense profits if they will develop houses in this site. Also, with the escalating price of land taking effect in this region, they might opt to resale the site after developing it. That is also a good strategy to realize anonymous profit later in the future. The lesson learnt from this appraisal report is that the property prices across Hong-Kong is continually increasing meaning that within few years in the future, the prices will be amicably high. Investors who take the chance to heavily invest in property during the current times will realize great profits in the future after resale of their assets.