Prosperity REIT Unit Holders Reject HK$1.9B Deal for Phoenix’ Kwun Tong View

Unit holders in ARA Asset Management-controlled Prosperity REIT overwhelmingly rejected the trust’s proposed HK$1.9 billion acquisition of an office building in Hong Kong this week, according to a statement by the trust to the Hong Kong stock exchange.

The proposed purchase of the Kwun Tong View building at 410 Kwun Tong Road is said to have lost the support of Li Ka-shing’s Cheung Kong Property Holdings, which holds nearly 19 percent of the units in Prosperity REIT. In all, owners of more than 61 percent of the units in the Hong Kong-based real estate investment trust voted against two resolutions that would have paved the way for Prosperity to consummate a preliminary agreement with Phoenix Property Investors to acquire the office tower in Kowloon East from the private investment firm.

In the statement on behalf of the board, Prosperity REIT CEO Wong Lai Hung confirmed that the acquisition would not be proceeding, but did not speculate on reasons for the lack of unit holder support for the REIT manager’s preliminary agreement.

For Phoenix, the private investment house expressed confidence in the marketability of Kwun Tong View, which is said to be the only en-bloc property along Kwun Tong Road currently on the market. “For us this is business as usual and life goes on,” a Phoenix representative told Mingtiandi. “We are already in discussions with multiple prospective buyers” he said concerning the potential sale of the redeveloped industrial building.

Unit Holders Concerned Over Debt

According to reports in the Hong Kong local media, CK Property had indicated late last month that it would not support the acquisition, which had been announced to the stock exchange on September 12^th. CK is also a major shareholder in ARA Asset Management, which controls Prosperity REIT. ARA Asset Management chairman Justin Chiu serves as a director of Cheung Kong Property, assuring that the terms of the proposed acquisition were clear to the REIT’s major shareholder before the preliminary agreement was signed.

Unit holders are said to have raised concerns over the level of debt that Prosperity REIT was taking on in order to acquire the building, as well as the potential upside for a building that is largely leased to government tenants.

In announcing the Kwun Tong View acquisition, Prosperity REIT indicated that the trust had entered into an agreement with Singapore’s DBS Bank for an unsecured term loan of up to HK$1.95 billion to finance the deal. According to its earlier statement, the financing of the acquisition would boost the REIT’s gearing ratio to more than 37 percent from 26.5 percent, with a potential hike in US interest rates looming (Hong Kong’s currency is pegged to the US dollar).

Questions Over Project’s Upside

While Kwun Tong View occupies a prime location next to One Pacific Centre and SHK’s Millennium 5 complex in the up and coming commercial area, it is 47 percent leased to government tenants, whom some analysts see as resistant to future rent increases.

Currently nearly 89 percent occupied according to Prosperity REIT, observers also raised concerns about the opportunity to improve the project’s yield, which is said to currently be less than three percent. There were also issues around a number of retail leases in the building said to be set to expire in 2019.

Prosperity’s management had argued in favor of the acquisition due in part to the potential of the Kwun Tong area, which has seen significant redevelopment around the site of the former Kai Tak airport. “An increasing number of multinational firms have chosen to acquire office spaces in Kwun Tong for their own-use or investment purposes,” the REIT’s management said in its earlier statement.

The trust also noted the value of government redevelopment efforts nearby, including the Yue Man Square at the centre of the Kwun Tong area. Kwung Tong View connects via a footbridge to the 4 million square foot urban renewal project.

Prosperity already owns a number of properties in Kowloon East, including Prosperity Place on Shing Yip Street and 9 Chong Yip Street, along with the combination industrial and office project Prosperity Center at 25 Chong Yip Street.