World’s most ex­pen­sive sky­scraper deal turns sour

Business World - - The World - Bloomberg

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 $5.2 bil­lion for Mr. 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-story tower, the com­bi­na­tion of anti-govern­ment protests, the coro­n­avirus pan­demic and es­ca­lat­ing US-China ten­sions has seen va­can­cies surge, rents drop and deal­mak­ing dry up.

Just one sale has been made this year — at a 35% 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% 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 col­or­ful nick­names like “Minibus King” and “Queen of Shells” banded to­gether to buy Mr. Li’s 75% stake in late 2017, Hong Kong’s of­fice prop­erty mar­ket was rid­ing high. Prices in Cen­tral had risen 20% in just un­der a year, ac­cord­ing to Sav­ills Plc, and the of­fice va­cancy rate in the district was just 2%. (CK As­set Hold­ings Ltd., Mr. Li’s prop­erty arm, sold the other 25% of the tower in the years af­ter it opened in 1998.)

Af­ter the deal closed in mid-2018, 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 off­loaded more than eight floors and a dozen of­fice suites for about $ 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 deep­estever re­ces­sion, with the erup­tion of antigov­ern­ment 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 US also chilled the out­look for the fu­ture of Asia’s fi­nan­cial hub.

All that has vir­tu­ally put an end to deal­mak­ing 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 $ 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.

Hong Kong CBD of­fice rents have slumped since protests erupted in mid-2019

“As they can’t sell at a good price right now, they would want to off­load 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% this year, ac­cord­ing to Jones Lang LaSalle, Inc.

And with va­can­cies at a 16-year high, prime of­fice rents may fall a fur­ther

5% over the rest of this year, ac­cord­ing to Bloomberg In­tel­li­gence.

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 fa­vor sta­bil­ity in own­er­ship and man­age­ment. The Cen­ter’s va­cancy rate was 19% in Au­gust, com­pared with 5.2% 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 ($8.90) per square foot a month, 20% 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% 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 turbo-charge 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. —

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