Gaw Capital Said to Invest in HK$15B Office Deal in Quarry Bay

Four months after buying a pair of Hong Kong office buildings from Swire Properties for HK$15 billion ($2 billion), a privately held affiliate of mainland investor Chen Chang Wei’s Hengli Group has reportedly recruited Gaw Capital Partners to take as much as a 65 percent stake in Cityplaza Three and Cityplaza Four in Quarry Bay.

The reported investment comes after market sources familiar with the discussion have informed Mingtiandi that Hengli, which is said to have been planning to borrow 80 percent of the cost of the June acquisition, has been shopping for mezzanine financing for the pair of 1990s-vintage office blocks.

While the reported investment by Gaw Capital has not yet been confirmed, reports in the local press citing market sources indicate that the Hong Kong-based private equity shop may be investing as much as HK$13 billion for a 65 percent stake.

In response to inquiries from Mingtiandi, sources at Gaw Capital declined to comment, and Mingtiandi was unable to independently confirm financial details of the reported investment.

Borrowing to Fund a Strata Scheme

When BVI-registered, Henglilong Investments Limited bought the 21-storey Cityplaza Three and 24-storey Cityplaza Four in June, the company’s sale and purchase agreement with Swire Properties specified an unusually distant target date for closing the deal of April 2019.

The 10 month closing period allowed Hengli, which is controlled by a low-profile mainland tycoon with ties to Wang Jianlin’s Dalian Wanda Group, a lengthy period in which to arrange financing before needing to make final payment on the purchase.

A Reuters report published less than two weeks after the agreement was announced cited three sources who indicated that Hengli hoped to borrow 80 percent of the purchase price, while planning to sell individual floors in the tower separately, in a manner similar to the investor consortium which purchased the Center on Queen’s Road in Central last year for $5.2 billion.

In the purchase of the Center, a team of buyers which eventually included Shimao Property chairman Xu Rongmao and Hong Kong businesswoman Pollyanna Chu sold bonds and took other high-yielding debt to finance the purchase of the 79-storey tower from Li Ka-shing’s CK Asset at an average cost per square foot of HK$33,000.

The group has since been selling off individual floors and smaller units in the tower for as much as HK$55,000 per square foot.

Tighter Credit, Slower Market Precede Hengli Stake Sale

Chen and Hengli Group may have been caught by a changing market, however, as what had been raging demand for Hong Kong office assets through all of 2017 and the first half of 2018 has lost much of its momentum in the last two months.

According to data from Hong Kong-based brokerage Midland Realty, sales of office properties in the city were down by more than 28 percent last month sliding to HK$1.35 billion from HK$1.86 billion in August, as concerns over rising interest rates, tighter credit conditions on the mainland and a growing US-China trade war cooled off what had been a record year for sales of both en bloc and strata title office properties.

Among the speculative buyers of The Center, local investor Johnny Cheung Shun-yee, in August parted with two of his four floors in the tower in August, with the 49^th floor changing hands for between HK$41,331 to HK$45,689 per square foot, according to a statement by the buyer, Guangdong’s Hopson Development.

In April, when Cheung put his floors on the market, the veteran property trader had declared an asking price of HK$55,000 per square metre.

Emma Zhou contributed additional research to this report.