Investors Who Paid US$5.2b For HK Office Tower Face Pandemic Woes
HONG KONG – A group of investors who forked out billions to buy Li Ka-Shing’s 75 percent stake in the city’s 5th tallest skyscraper now made a grim realization why property cliques here have a saying not to buy what Hong Kong’s wealthiest man is selling, reported Bloomberg on Wednesday (30 September).
In late-2017, the city’s commercial property market was abuzz after local investors teamed up to acquire three-fourths of The Center for US$5.2 billion, making it the most expensive skyscraper in the globe. Among the investors, the most high-profile were Ma Ah-muk, which owns a minibus company, and Pollyanna Chu, whose firm finances small-cap companies.
Back then, the city’s office space market was sizzling hot. In fact, data from Savills showed that prices for office premises in Central rose 20 percent in barely a year, and the vacancy level was under 2 percent.
Knight Frank’s Executive Director Thomas Lam said “it was a reasonable investment decision back then.” Market values of office premises were higher than the average cost incurred by the group, flipping floors for a profit was not hard.
After the multi-billion sale was completed in mid-2018, the group quickly divided up the 47 levels, office suites, retail shops, and 402 parking lots at The Center, with Chu and Ma Ah-muk initially claiming 7 and 13 floors respectively.
Thereafter, the motley group of investors started selling the properties. In just 12 months, they have divested over 8 floors and 12 office suites for a total of US$1.3 billion, netting them hundreds of millions of US dollars
“But now, as rental yields and office demand decline amid the worsening economy, buyers are much more reserved,” noted Lam.
In fact, merely one sale at The Center was recorded in 2020, and it was sold at a 35 percent discount compared to early-2019 market rates, revealed Real Capital Analytics.
Vacancy level at the commercial property is also high at 19 percent in August versus 5.2 percent for the rest of Central based on Centaline Property Agency’s data, as tenants prefer a stable landlord rather than a group of investors known for flipping properties.
Additionally, calculations based on figures provided by Midland IC&I show that leases agreements inked this year at The Center have an average rent of merely HK$69 (US$8.90) psf per month and this is 20 percent lower on an annual basis.
The weak demand for office space is attributed to the COVID-19 pandemic, Hong Kong protests, and the intensifying tensions between China and the US.
Moreover, the prospects of Hong Kong’s broader office market don’t appear rosy. JLL said office valuations here could fall by up to 20 percent, while Bloomberg Intelligence thinks that prime office rents may decline by an additional 5 percent over the rest of 2020 as vacancies are at a 16-year high.
Meanwhile, after the US$5.2 billion divestment, Li’s CK Asset Holdings used part of proceeds to buy the London HQ of UBS Group for US$1.3 billion in June 2018. The Swiss financial intuition will lease the building until 2035 and rental yields for the commercial property in 2018 exceeded that of The Center by nearly two-fold, proving that Li outsmarted the group of investors.