Phoenix Property Investors has been receiving offers of over HK$9 billion ($1.15 billion) from buyers interested in purchasing Tower 535 in Causeway Bay, according to sources familiar with the discussions who spoke with Mingtiandi.
The private equity fund manager, which developed the property through one of its funds, still retains a stake in the 270,473 square foot (25,128 square metre) alongside its fund, after having sold a 50 percent share to a South Korean institution in 2015.
The Hong Kong-based firm, which would need to have the participation of it partners to sell the whole building, is said to have a set a threshold price of HK$9.5 billion ($1.22 billion) for commencing any discussion regarding the property, which is not currently on the market, but has been a frequent target for investors looking for a core office asset in the city.
At Phoenix’ threshold price, a sale of the Ginza-style tower would be equivalent to HK$33,275 per square foot, with even a transaction at the base price ranking the deal among Hong Kong’s largest real estate transactions of 2019.
Sources at Phoenix declined to comment on the details of a potential sale or any reported bids when approached by Mingtiandi.
One-Third Leased to WeWork
The 25-storey high-rise, which gives views of Victoria Harbour from the food-and-beverage zone on its top floor, is situated behind the World Trade Centre at 535 Jaffe Road, a 2 minute walk from Causeway Bay metro station.
Opened in 2016 and designed by American architects Skidmore, Owings and Merrill in a configuration of steel-and-glass “bundled lobes”, Tower 535 has a four-storey retail podium, 16 floors of office space, and a further five storeys for dining, entertainment and shopping.
WeWork, famous for luring tenants with promises of free beer on tap, chose the tower for its first Hong Kong location in 2016, and the US co-working giant is currently tied into a lease for 100,000 square feet of space. Spread across eleven floors of the building WeWork’s lease, which is due to expire in 2025, equates to more than a third of the property’s rental volume.
Average asking rents for Tower 535 stand at around HK$65 per square foot per month, while vacancy rates were at 4.3 percent at the end of May, according to data provided to Mingtiandi by Colliers International.
Exiting at an Unsettled Time
Phoenix Property Investors, which bought three shopping centres in Tseung Kwan O nine months ago from developer Wheelock and Co, is said to have spent in the region of HK$4 billion on the redevelopment of Tower 535 after initially purchasing an aging building on the site thirteen years ago for a figure reported to be HK$2.8 billion.
Should a transaction take place, the private equity manager would be exiting its investment at a time when Hong Kong market sentiment has become unsettled. Phoenix is understood to have last year explored the potential sale of the stake held by its fund in Tower 535 last year but no transaction for the minority stake ultimately took place.
“The economic slowdown and US-China trade war has prompted investors to rethink their strategy and to remain conservative,” Colliers International said in a recent quarterly report on the office sector, adding that there is limited room for price growth in grade A office buildings in Hong Kong given current high prices and expected slower economic growth globally for the rest of the year.
Co-Working Loses Steam in Hong Kong
The building’s marketers may be banking on using the buzz of WeWork’s ping pong-and-beer brand to lure in potential buyers, after a co-working wave swept across Hong Kong last year with flexible office firms leasing 900,000 square feet of space in the city.
But co-working operators have taken their foot off the expansion throttle this year in Asia’s priciest real estate market, according to Colliers.
The property agency confirmed in a recent report that WeWork had given up plans to expand in Two Harbour Square where it currently leases multiple floors, and Reuters reported in April that the co-working giant had pulled out of at least five negotiations to take on new space in Hong Kong.
Critics say that having the core of a building taken up by a loss-making co-working provider, which depends on the whim of its Japanese backer Softbank, may be a negative rather than a positive.
WeWork’s rival, Beijing-based Kr Space, was bailed out by investors earlier this year after defaulting on lease commitments in Hong Kong and Shanghai.