Capital structure and profitability of the property and construction sectors in Hong Kong

Publication Date01 December 2002
AuthorChiang Yat Hung,Chan Ping Chuen Albert,Hui Chi Man Eddie
SubjectProperty management & built environment
Journal of Property Investment &
Finance, Vol. 20 No. 6, 2002,
pp. 434-453. #MCB UP Limited,
DOI 10.1108/14635780210446469
Capital structure and
profitability of the property
and construction sectors in
Hong Kong
Chiang Yat Hung, Chan Ping Chuen Albert and
Hui Chi Man Eddie
Department of Building and Real Estate, Hong Kong Polytechnic
University, Hong Kong, China
Keywords Gearing, Construction industry, Property, Competition, Hong Kong
Abstract This paper examines the inter-relationship between profitability, cost of capital and
capital structure among property developers and contractors in Hong Kong. Whilst major
indigenous local developers are among the largest and the most profitable in the world, their
contractor counterparts are generally small and nowhere near as profitable. An analysis of
financial data suggests that gearing is generally higher among contractors than developers.
However, it does not mean that contractors borrow more than developers. Indeed they do not
need to borrow as much as developers even if they have the assets to pledge as collateral.
Contractors do not have to pay for high land costs, and they obtain project finance from
developers through interim payments in lump sum contracts that are widely adopted in the
industry. Their high gearing reflects more their low equity base than high level of debts. Their
costs of equities are about double the developers', probably due to their usually low or negative
profit margins. This conclusion is substantiated by further regression analysis of the data. The
findings indicate that capital gearing is positively related with asset but negatively with profit
margins. This article concludes with a discussion on implications of such profitability divide
between the two sectors on the unequal relationship between developers and contractors, and on
their competitiveness.
The study compares and contrasts developers' profitability and contractors'
lack of it in Hong Kong, and the implications on their capital structure.
Property developers in Hong Kong are large and profitable by international
standards, whilst local building contractors are small and their markets highly
competitive (Chiang et al., 2001). This polarisation of profitability is attributed
to access to finances, and results in an imbalance of bargaining power between
developers and contractors. Such imbalance has major implications for
procurement and contract strategies.
The research register for this journal is available at
The current issue and full text archive of this journal is available at
The authors are grateful to Nick French and the anonymous reviewers for their comments, to
the three bankers we interviewed, and to Cheryl Yue and Rene Leung for their research
assistance. This study is based on a research project funded by the Hong Kong Polytechnic
University Research Grant.
Academic papers:
Capital structure
and profitability
In 2000, Hong Kong had the largest and most profitable property firm in the
world (BusinessWeek, 2000), but only one construction firm in the ``Top 225
International Contractors'' (Engineering News Record, 2000). They were Cheung
Kong Holdings and Paul Y. ± ITC Construction Holdings Ltd respectively. The
former ranked first in terms of both market value and profits. The latter ranked
54th in terms of international revenue.
The magazine BusinessWeek has been publishing its annual ``Global 1000''
surveys in July each year. It lists the world's largest firms in terms of market
value by country and industry. Table I is compiled from four annual surveys
between 1997 and 2000, highlighting the ``real estate'', and ``construction and
housing'' industries. There were altogether 38 industries classified into seven
broad economic sectors.
The first row shows the total market values of all the ``Global 1000'' firms.
Out of the ``Global 1000'', there were only 10-15 real estate firms in a year.
However, about one-third to almost half of these real estate firms had come
from Hong Kong. Altogether their combined market values ranged between 40
2000 1999 1998 1997
Market value of all ``Global 1000'' firms (US
$ billion) (M)
23,943 19,699 16,625 13,249
All real estate firms
Number 10 15 12 15
Market value (% of ``M'') 0.4 0.6 0.5 1.2
Real estate firms in Hong Kong
Number 3 5 4 7
Market value (% of ``M'') 0.2 0.3 0.2 0.8
Market value (% of GE or MS) 8.1 14.5 12.7 50.6
Market value (% of all real estate firms) 44.3 47.6 39.4 61.2
Hong Kong rankings in ``Global 1000 real
estate'' industry
1 (CK)
3 (SHK)
5 (HLD)
1 (SHK)
2 (CK)
4 (HLD)
9 (WH)
11 (NWD)
1 (CK)
2 (SHK)
7 (HLD)
11 (NWD)
1 (SHK)
2 (CK)
4 (HLD)
5 (NWD)
6 (WH)
12 (TSTP)
14 (SL)
All ``construction and housing'' firms
Number 2349
Market value (% of ``M'') 0.1 0.1 0.1 0.3
Largest ``Global 1000'' firm GE MS GE GE
Market value (US $ billion) 520 407 272 198
Notes: Hong Kong real estate firms: CK = Cheung Kong Holdings; SHK = Sun Hung Kai
Properties; HLD = Henderson Land Development; WH = Wharf (Holdings); NEW = New
World Development; TSTP = Tsim Sha Tsui Properties; SL = Sino Land. Largest ``Global
1000'' firms: GE = General Electrics (USA); MS = Microsoft (USA)
Source: Business Week, 1997, 1998, 1999, 2000
Table I.
Hong Kong real estate
firms in ``Global 1000''

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