Sale of Kowloon Office Block Faces Hurdles as $385M China Mobile Offer Reported

China Mobile is reportedly in talks to acquire the former Hong Kong headquarters building of defaulted mainland property firm Cheung Kei Group, after the grade A office asset lost nearly two thirds of its value over the past two years.

The mainland telecom operator has made an offer in recent weeks for the East Tower of the One HarbourGate complex in Hung Hom, with the offer price set as a range that goes up to HK$3 billion ($385 million) subject to certain conditions, according to Bloomberg, citing people familiar with the matter.

Market analysts who spoke with Mingtiandi pointed to obstacles to any potential sale of the Kowloon property, including low leasing rates for office space in the city and a reported outstanding loan amount of HK$4.2 billion on the building.

Hong Kong’s office market continues to suffer from an extended slump with the total amount of space leased in the city contracting by 57,500 square feet in September, as average rents city-wide declined by 1.1 percent from a month earlier, according to JLL.

Financing Cost Versus Cap Rate

With current monthly rents in the Hung Hom area averaging HK$20-$30 per square foot, an offer of HK$2.54 billion for the property would equate to an investment yield of no more than 3.5 percent for the building’s 254,000 square feet (23,597 square metres) of office space, should it reach 100 percent occupancy, putting the cap rate below current financing costs.

Based on figures from Savills, which is marketing the property, the building formerly known as the Cheung Kei Centre was 84 percent occupied as of May last year. Yields for Hong Kong office properties sold in the third quarter averaged 3.0 to 4.0 percent, according to a recent report by Colliers.

The high end of China Mobile’s reported offer price range represents a 57 percent decline from the property’s HK$7 billion valuation in 2022, according to Savills, which has been marketing the asset since 2023. The consultancy launched the latest marketing exercise in July after a tender concluded in August last year without a transaction being consummated.

Second Sale Attempt

The harbourfront office block was seized last year by creditors of entities controlled by Cheung Kei boss Chen Hongtian as his company struggled with a liquidity crisis which led to a string of defaults and triggered repossessions of the tycoon’s global assets, including luxury homes in Hong Kong and office towers in London.

Chen had paid HK$4.5 billion to acquire his Kowloon asset in 2016 from the building’s developer, Hong Kong’s Wheelock Properties, with that deal equivalent to HK$16,129 per square foot when the property’s 26,000 square feet of retail space are included.

Details of the reported transaction are said to still be under negotiation and could change, with the parties aiming to complete the deal by the end of the year, according to Bloomberg. In August, market sources told Mingtiandi that China Telecom and a major Hong Kong-based developer had separately submitted bids for the asset. China Mobile had not responded to Mingtiandi inquiries by the time of publication.

The 17-storey building at 18 Hung Luen Road currently serves as the headquarters of Canadian insurer Sun Life’s Hong Kong operations and totals around 279,000 square feet (25,920 square metres) in gross floor area, including 254,000 square feet of office space across 15 floors. The property also features a 26,000 square foot, two-storey retail podium and 155 parking spaces.

Chen is said to have borrowed over HK$4.5 billion in 2019 from a consortium of lenders including Hang Seng Bank, which appointed a pair of PricewaterhouseCoopers partners as receivers of the asset in March 2023.

Capital values of grade A offices in Hong Kong have plummeted 41.6 percent from 2019 peaks through 30 June, with vacancy hovering near record highs at the end of September amid weak leasing demand and oversupply, according to JLL.

The building forms one of two towers in the One HarbourGate complex, with mainland insurer China Life having acquired the West Tower from Wheelock in 2016 for HK$5.85 billion.

Wave of Seizures

One HarbourGate East Tower was repossessed around the same time that two of Chen’s luxury residences in Hong Kong were also seized by creditors. In early 2023, Bank of East Asia took over the tycoon’s 9,212 square foot mansion at 15 Gough Hill Road in the city’s prestigious Peak area, while Bank of Communications seized Chen’s 5,154 square foot apartment at Swire Properties’ Opus complex in the Mid-Levels.

Last August, receivers sold the Opus apartment at 38 percent below market value at the time in a HK$420 million deal. The tycoon had paid HK$387 million for the unit in the Frank Gehry-designed building in 2015.

15 Gough Hill Road had yet to find a buyer as of July. Chen purchased that three-storey, six-bedroom home for HK$2.1 billion in 2016 after complaining that the Opus apartment was “a little bit too tiny”.

Chen’s financial struggles have also led to his London assets being placed into receivership and put up for sale. Earlier this year, a sale of the 5 Churchill Place office block in the Canary Wharf financial district reportedly collapsed shortly after receivers who had seized the property in May 2023 had lined up a £110 million offer for the former Bear Stearns UK headquarters.

Cheung Kei had paid £270 million to acquire that building in 2017 from investment firm Said Holdings, the same year that it purchased 20 Canada Square, located a four-minute walk from 5 Churchill Place, for £410 million from Toronto-based Brookfield. Receivers took control of that 12-storey office and retail building in June 2023 and have yet to find a buyer for the asset.