Construction Defects – Crisis Management – SVA Interviewed by South China Morning Post

New World Development’s decision to tear down and rebuild two of the seven blocks at The Pavilia Farm residential project in Tai Wai has shocked Hong Kong, wiping out more than HK$6.6 billion (US$850 million) in market value in just two days.

The market is closely watching how CEO and executive vice-chairman Adrian Cheng Chi-kong handles the company’s biggest crisis since he took over in 2017. He is the third generation of the Cheng family to lead New World Development, which was founded by his late grandfather, Cheng Yu-tung, in 1970.

New World did not waste any time in coming up with a compensation package, which analysts say is more than adequate, to allay the fears of 846 affected buyers of flats in the project, the biggest launch under his leadership.

Nearly 98 per cent of the 3,090 units at The Pavilia Farm, which is being developed in three phases, have been sold as of June 30.

The generous compensation package reflects his stated stance that social responsibility matters more than profits. In an exclusive interview with the Post in November 2020, Cheng said: “In the next 10 years, nobody will ask [which developers] are the biggest or smallest, but rather they will care about their social impact on society.”

Cheng, who read East Asia Studies at Harvard University, went on to say that while “developers usually focus on how to increase gross floor area and maximise profits, we also make profits and we gain premiums [for shareholders], but we have a balance.”

The decision to demolish the two tower blocks came after defects were found in the concrete walls in the podium of blocks one and eight of The Pavilia Farm as it “did not meet the requirements of the approved design” during concrete strength tests, according to a statement by the subway operator MTR Corporation, which is developing the project with New World Development.

As such a scandal has never occurred in Hong Kong’s private property market, there have been calls from a lawmaker to launch an investigation to get to the bottom of the issue.

The Post spoke to a few experts on how the company should deal with the issue. Here are a few excerpts:

What measures should New World undertake to reduce the damage to its corporate image and Hong Kong’s property market?

A generous compensation package would certainly go some way to assuage the direct buyers’ concerns, but the wider damage to public confidence, especially in this current febrile political atmosphere, is harder to gauge, said Steve Vickers, chief executive of Steve Vickers and Associates, a specialist political and corporate risk consultancy. “Initial reports seem to suggest that the problems relate to the wrong type of cement being used for a major structural wall. I am sure matters will turn out to be much more complex.”

While finger-pointing at top New World management seems a tad early, given that the full facts are not yet known, the matter could, however, become something of a test of people’s faith in government supervision as well as a corporate issue, he said.

Does New World need to strengthen its quality control over its property projects?

The crisis is not yet over until the firm explains the details of what went wrong with the construction of The Pavilia Farm, said Kenny Tang Sing-hing, chief executive of China Hong Kong Capital Asset.

The construction defects do reflect that it has a problem with quality control, he said.

However, under Adrian Cheng’s leadership the standard of property projects has improved a lot compared with his father and grandfather who focused on competing on price and maximising profit, Tang said. The younger Cheng has put a lot of efforts to improve quality and style by bringing in famous architects and coming up with innovative designs to differentiate New World from top players in this highly competitive market, he added.

How did New World Development handle The Pavilia Farm safety issue?

Whenever there is a crisis, the most effective way is to deal with the problem is by making it public immediately and releasing the details, said Joseph Tsang, the chairman of JLL in Hong Kong.

Apart from demolishing and rebuilding the two blocks, the affected buyers, whether they proceed with the purchase or terminate the agreement, will receive compensation.

New World did a good job on both fronts, he said.

While no affected buyer has filed a complaint regarding the safety of the project, they are also worried that they may not have a chance to buy another flat above an MTR station with the same budget, as home prices will continue to soar even if they cancel the deal, Tang said.

What are New World’s compensation options for buyers?

New World has come with two compensation options for the 846 buyers of the two affected blocks.

Customers who have started to pay the mortgages on their flats will receive compensation of up to 7.6 per cent of their purchase price. This means the buyer of a HK$15 million unit will be eligible for HK$1.15 million.

Committed buyers who choose to pay their mortgages after they move in will receive HK$380,000 in interest compensation.

Those who cancel their purchases will each receive HK$310,000, inclusive of rental subsidy and interest compensation.