Vancouver Sun

How the world's most ex­pen­sive sky­scraper deal turned sour

- SHAWNA KWAN AND RICHARD MACAULEY Business · Finance · Investing · Real Estate · Urbanism · Infectious Diseases · Health Conditions · United States of America · Beijing · CK Asset · Asia · Morningstar · San Francisco · Kingston · Macao · UBS · London · Switzerland · Hong Kong · Li Ka-shing · Newmark & Company · Savills · Midland · Jones Lang Lasalle, Inc. · Centaline Property Agency · Midland · Nan Fung Group

There's a say­ing in Hong Kong prop­erty cir­cles that if the city's rich­est man, Li Ka-shing, is sell­ing, you don't want to be the buyer. Now, a group of in­vestors who paid US$5.2 bil­lion for Li's stake in The Cen­ter al­most three years ago — mak­ing it the world's most ex­pen­sive sky­scraper — is find­ing out why. Af­ter ini­tially mak­ing quick prof­its flip­ping floors in the 73-storey tower, the com­bi­na­tion of anti-gov­ern­ment protests, the coro­n­avirus pan­demic and es­ca­lat­ing U.S.-China ten­sions has seen va­can­cies surge, rents drop and deal mak­ing dry up.

Just one sale has been made this year — at a 35 per cent dis­count to early 2019 prices, ac­cord­ing to prop­erty-data provider Real Cap­i­tal An­a­lyt­ics. Al­most one-fifth of the build­ing is empty — one of the high­est va­cancy rates in Hong Kong's sought-af­ter cen­tral business district — and rents are down about 20 per cent from a year ago.

“It was a rea­son­able in­vest­ment de­ci­sion back then,” said Thomas Lam, an ex­ec­u­tive di­rec­tor at Knight Frank LLP. Mar­ket prices were higher than the av­er­age cost the group paid, and flip­ping floors seemed easy, he said. “But now, as rental yields and of­fice de­mand de­cline amid the wors­en­ing econ­omy, buy­ers are much more re­served.”

When a group of lo­cal in­vestors with colour­ful nick­names like “Minibus King” and “Queen of Shells” banded to­gether to buy Li's 75 per cent stake in late 2017, Hong Kong's of­fice prop­erty mar­ket was rid­ing high. Prices in Cen­tral had risen 20 per cent in just un­der a year, ac­cord­ing to Sav­ills Plc, and the of­fice va­cancy rate in the district was just two per cent. (CK As­set Hold­ings Ltd., Li's prop­erty arm, sold the other 25 per cent of the tower in the years af­ter it opened in 1998.)

Af­ter the deal closed in mid2018, the group quickly divvied up the 47 floors, 402 park­ing spa­ces, of­fice suites and re­tail out­lets and started flip­ping them. Within a year, they had off-loaded more than eight floors and a dozen of­fice suites for about US$1.3 bil­lion, reap­ing hun­dreds of mil­lions of dol­lars profit.

Then in June 2019, the city was rocked by the first of a dou­ble-whammy of calami­ties that has sent the econ­omy into its deep­est-ever re­ces­sion, with the erup­tion of anti-gov­ern­ment protests that grew in­creas­ingly vi­o­lent and dis­rup­tive. The un­rest ran into the New Year, when the coro­n­avirus pan­demic took hold, while wors­en­ing ten­sion be­tween China and the U.S. also chilled the out­look for the fu­ture of Asia's fi­nan­cial hub.

All that has vir­tu­ally put an end to deal mak­ing at The Cen­ter. One sale that was in con­tract when the protests broke out was even­tu­ally ter­mi­nated by the end of 2019, with the buyer for­feit­ing a US$1.1 mil­lion de­posit, ac­cord­ing to Real Cap­i­tal An­a­lyt­ics. And just the one sale has been struck this year, de­spite three floors be­ing on the mar­ket.

“As they can't sell at a good price right now, they would want to off-load just one or two floors for some cash and keep most of their port­fo­lio for rent un­til the mar­ket turns around,” said James Mak, a district sales di­rec­tor in Mid­land IC&I Ltd.

“These ty­coons from the last gen­er­a­tion are not will­ing to lose money.”

The dearth of ac­tiv­ity au­gurs poorly for the broader of­fice mar­ket. Of­fice val­u­a­tions in the city may slump as much as 20 per cent this year, ac­cord­ing to Jones Lang LaSalle Inc. And with va­can­cies at a 16-year high, prime of­fice rents may fall a fur­ther five per cent over the rest of this year, ac­cord­ing to Bloomberg In­tel­li­gence.

The of­fice mar­ket can't count on main­land Chi­nese buy­ers for a quick re­bound ei­ther. Chi­nese in­vest­ment in both in­come-pro­duc­ing prop­er­ties and de­vel­op­ment sites in Hong Kong de­clined 90 per cent and 73 per cent re­spec­tively in the first half of the year, ac­cord­ing to Sav­ills Plc.

Keep­ing floors for rental in­come isn't a money-spin­ner ei­ther.

The change in own­er­ship from one of Hong Kong's big­gest devel­op­ers to a group of in­di­vid­ual own­ers with a his­tory of flip­ping prop­erty has de­terred ten­ants who favour sta­bil­ity in own­er­ship and man­age­ment. The Cen­ter's va­cancy rate was 19 per cent in Au­gust, com­pared with 5.2 per cent in the rest of Cen­tral, ac­cord­ing to Cen­taline Prop­erty Agency Ltd.

To make things worse, leases signed this year at The Cen­ter are fetch­ing an av­er­age of just HK$69 (US$8.90) per square foot a month, 20 per cent lower than a year ago, ac­cord­ing to Bloomberg cal­cu­la­tions from data pro­vided by Mid­land IC&I.

All that has put the buy­ers in a hole.

“These guys were hop­ing to flip the prop­er­ties at a 30 per cent gain straight away, but they've been caught out by other fac­tors,” said Phillip Zhong, a real es­tate an­a­lyst at Morn­ingstar In­vest­ment Ser­vice. Rental in­come may not cover in­ter­est pay­ments on loans to fi­nance the deal, mean­ing even sell­ing at the ini­tial cost price would “mean tak­ing a big hit over­all,” he said.

The back­ground of the in­vestors be­hind the record-break­ing deal drew as much in­ter­est as the trans­ac­tion it­self. In­stead of a listed de­vel­oper or big pri­vate-eq­uity fund ubiq­ui­tous in large prop­erty deals, the con­sor­tium brought to­gether a dis­parate group of lo­cal en­trepreneur­s who have cap­i­tal­ized on Hong Kong's ever-ris­ing prop­erty prices to tur­bocharge their for­tunes.

The most high-pro­file mem­bers of the group are Ma Ah-muk and Pollyanna Chu, who ini­tially took 13 and seven floors re­spec­tively.

Ma be­gan build­ing a se­ri­ous for­tune in 1977 when he founded Yan Yan Mo­tors Ltd., which op­er­ates Hong Kong's minibus routes, earn­ing him the moniker of the “Minibus King.” Ma's fleet of green ve­hi­cles serve ar­eas stan­dard buses can't reach, act­ing both as a last-mile op­tion for com­muters as well as a way to avoid the crowded metro trains.

Chu is known as the “Queen of Shells” for fi­nanc­ing small-cap com­pa­nies. She be­gan her ca­reer in­vest­ing in San Fran­cisco real es­tate be­fore re­turn­ing to Hong Kong in 1992. Her Kingston Fi­nan­cial Group Ltd. has carved out a niche of­fer­ing un­der­writ­ing and mar­gin ser­vices for small com­pa­nies go­ing pub­lic.

Chu had a lengthy spell as Hong Kong's rich­est woman, and al­though her fam­ily em­pire now spans ho­tels and watch­mak­ers, her net worth to­day is a frac­tion of what it used to be. Kingston shares are down 18 per cent this year and her ex­po­sure to Ma­cau's casi­nos dur­ing pan­demic-in­duced shut­downs has caused fur­ther headaches. Chu's wealth now stands at about US$603 mil­lion — far be­hind to­day's rich­est Hong Kong woman, Vivien Chen of real es­tate de­vel­oper Nan Fung Group at US$4.8 bil­lion, ac­cord­ing to the Bloomberg Bil­lion­aires In­dex.

Rep­re­sen­ta­tives for Ma and Chu didn't re­ply to emails and calls re­quest­ing com­ment.

Af­ter sell­ing The Cen­ter, Li's CK As­set used part of the pro­ceeds to ac­quire 5 Broadgate — UBS Group AG's London head­quar­ters — for US$1.3 bil­lion in June 2018. The Swiss bank is com­mit­ted to the build­ing un­til 2035 and the rental yield for the London prop­erty was al­most dou­ble that of The Cen­ter, Ming Pao re­ported in 2018, cit­ing com­pany man­age­ment.

Once again, Li made the bet­ter deal.

 ??  ?? Li Ka-shing
Li Ka-shing

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