HK Investors Caught by Downturn After Paying Record $5.2B for The Center

With Hong Kong’s protests entering their sixth month and mainland investors continuing to face tighter liquidity, the once red-hot commercial property market in the Asian financial hub is on life support, which spells trouble for the owners of the city’s most expensive office property.

As office rents in the city continue to fall and sales of commercial space grind to a halt, speculators such as local financier Pollyanna Chu and Shimao Properties chairman Hui Wing Mao, who acquired 75 percent of The Center, a 73-storey office building on Queen’s Road Central from Li Ka-shing’s CK Asset Holdings for HK$40.2 billion ($5.2 billion) in October 2017, may be caught in bind.

At the time, with Hong Kong’s market for strata title office property enticing the investment consortium with the prospect of divvying up the tower for piece-by-piece sale to eager buyers, Chu, Hui and their associates hoped to flip their HK$33,000 per square foot purchase of the building into set of smaller, higher value sales after the top floor of the same building had sold for HK$55,854 per square foot in September of 2017.

World’s Priciest Building Loses Its Appeal

Now after having financed their acquisition of the Center with bonds yielding as much as 15.25 percent, some members of the Center consortium are paying dearly for their market optimism.

Not a single sale of a unit in the Center has been recorded since Hong Kong’s protests began in June, according to data from property information provider Real Capital Analytics, which has been tracking the deals in the building on Queen’s Road.

The London-based firm says that the absence of transactions illustrates the change in sentiment in Hong Kong, where office rents recorded their sharpest monthly drop in ten years during October, with average rents in Central 11 percent lower last month than they were at the same point last year, according to Knight Frank.

After a flurry of strata transactions early last year following the completion of the sale of the tower, there have been no deals in the building since tycoon David Chan Ping-chi, the chairman of local tape and film manufacturer Acme Group, who is known locally as the “King of Cassettes”, sold his 38th floor in the prime office tower to an unidentified mainland investor for HK$1.08 billion in June, according to an account in the Hong Kong Economic Times.

Chan’s anonymous buyer paid the equivalent of HK$42,000 per square foot of floor space, or around 27 percent more than the average value that the consortium paid for the property.

Only 30% of Space Successfully Flipped

According to RCA, there have been 24 transactions in total at the Center since it was acquired from CK Asset, with those deals amounting to about 253,000 square feet (23,504 square metres) or 30 percent of the 1.6 million square feet that the consortium of investors acquired.

With many of the individual buyers betting that the grade A tower would be worth more when sold off in pieces than they had paid for the skyscraper as a whole, they are now facing a sharp downturn in the market.

JLL reported just last Thursday that subdued leasing demand led to a monthly drop of 1.6 percent in grade A office rents in October compared to the previous month, which marks the biggest slide in Hong Kong since the 2009 financial crisis.

Commercial real estate transaction volumes have also taken a hit, with overall volumes in the city 41 percent lower in the third quarter of this year when compared with the same three months of 2018, according to RCA.

Just under two months ago, the government cancelled the sale of a commercial site on Hong Kong’s former airport when all of the tenders came in below the reserve price, giving an indication of the reduced appetite towards commercial projects in the city.

JLL reported that the office sales market continued to be quiet in October as investors looked for higher yields due to the increased risk in the market.

In a sign of buyer sentiment, Overseas success Limited was said to have acquired a small midzone unit at 181 Queen’s Road Central in Sheung Wan for HK$44.5 million, or HK$20,000 per square foot.

JLL said that the reported purchase price is equivalent to the unit price paid for the whole sixteenth floor of the building in 2016.