Hang Lung Properties and the Chengdu Decision (A)

Posted: 7 Feb 2012

See all articles by John D. Macomber

John D. Macomber

Harvard University - Business School (HBS)

Michael Shih-ta Chen

Harvard University - Business School (HBS)

Keith Chi-ho Wong

Harvard University - Business School (HBS)

Date Written: July 1, 2010

Abstract

A residential real estate developer competes in a heated auction for a prime retail development site in the interior of China during the 2009 boom. Total project cost might be in excess of $1billion US for over 4,000,000 square feet of building. Hang Lung Properties has enjoyed success in residential building in Hong Kong but has focused on very limited projects in China, notably two retail properties in Shanghai. After a decade in Shanghai the firm decides to enter second tier Chinese cities including Chengdu, a city of 11 million in interior China. The case covers Hang Lung Properties' due diligence and thought process with respect to anticipated rental income, construction costs, and land costs. The auction includes many other well capitalized firms and the price escalates. Hang Lung's team must decide whether to participate or withdraw. Students need to use judgment with respect to estimates of key variables including stabilized income, construction cost, and minimum expectations for return on investment in order to prepare their bids. The (B) case goes into further steps in the auction as well as Hang Lung Properties' internal discipline with respect to asset types, infrastructure in target cities, and baseline returns.

Learning Objective: Teaches how to assess value of a proposed large scale real estate development, how to evaluate land parcels, how to work backwards into value of land at auction, strategic discipline in real estate with respect to asset classes (retail, office, residential), with respect to geography (Hong Kong, first tier cities in China, second tier cities in China), and with respect to infrastructure.

Suggested Citation

Macomber, John D. and Chen, Michael Shih-ta and Wong, Keith Chi-ho, Hang Lung Properties and the Chengdu Decision (A) (July 1, 2010). Harvard Business School Finance Case No. 210-089, Available at SSRN: https://ssrn.com/abstract=2000903

John D. Macomber (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Michael Shih-ta Chen

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Keith Chi-ho Wong

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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