88WL was sold for less than the land acquisition cost (Image: KaiLong)
Goldman Sachs and Hong Kong’s Kailong Group have sold a newly developed commercial building near Central for around $33 million less than they paid to acquire the site seven years ago, as property values in the Asian financial hub continue to slide.
A joint venture between the US investment bank and the local private equity firm has sold 88WL, a 25-storey office and retail block near the Macau ferry terminal, for HK$700 million ($89.4 million), according to an agency deal summary seen by Mingtiandi. The sale comes after the duo had late last year completed 88WL on the site of a trio of buildings acquired in 2017 and 2018 for a combined HK$962 million, including development costs, according to agency data.
With the tower spanning 67,770 square feet (6,296 square metres) of gross floor area, the partners are selling the project for the equivalent of HK$10,330 per square foot, the lowest price of any newly completed completed commercial building on Hong Kong island since 2012, according to information from MSCI Real Assets.
The buyer is reported to be the Cheung family which controls Hong Kong-listed Kingboard Holdings and Kingboard Laminates, with Goldman Sachs declining to comment on the reported transaction. Inquiries to Kailong Group had yet to receive a response by the time of publication.
An Atomic Bomb for the Market
The sale comes close to a year after Goldman Sachs had engaged CBRE to market the combined retail and office property, with the partners asking a reported HK$1.35 billion for the asset at the time.
KaiLong chairman Hei Ming Cheng has seen the market shift under his value-add strategy
“Given its location in the heart of the Greater Central district and the advantage of 999-year land tenure, there is unlimited potential for 88WL such as vertical F&B hubs, medical centres or corporate headquarters, making it an attractive investment opportunity for seasoned investors who are faithful in the Central and Sheung Wan area,” Jonathan Chau, an executive director with CBRE said in a statement launching a tender for the property in July.
With office rents in Hong Kong having fallen 33 percent since their 2019 peak, according to JLL, demand for commercial properties in the city has slipped, with that agency noting that values of grade A office buildings have plunged 34 percent since that time. Savills is forecasting a further 10 percent decline this year.
With last year’s tender scheduled to have closed in late September, by November the partners had, according to a Bloomberg report, slashed the asking price by a third to HK$900 million. Since that time, vacancy in Hong Kong’s office market has continued to climb, reaching a 20-year high of 15.9 percent by the end of 2023, according to agency data.
That vacancy is set to climb higher with the launch of new prime buildings in Central including Henderson Land’s The Henderson and CK Asset’s Cheung Kong Center II, with Greater Central, including Sheung Wan, expected to face new office supply of about 1.8 million square feet in 2024 and 2025, according to data from Hong Kong-based, CHFT Advisory and Appraisal.
Analysts estimate that Kailong and Goldman Sachs would have spent HK$288 to HK$388 million to redevelop 88WL, putting the sale price at around HK$648 less than the partners invested in the property, and prompting one veteran broker to call the deal, “An atomic bomb for Hong Kong’s commercial investment market.”
Located a two-minute walk from the Sheung Wan MTR station at 88 Wing Lok Street, 88WL has 12 floors of office space situated above a 11-storey retail podium, in addition to a mechanical floor and a sky garden on the 15th floor.
The building is currently 40 percent to 50 percent occupied, according to local media reports, with office rents currently averaging around HK$40 per square foot.
Hong Kong in Transition
The cut-price disposal of 88WL comes after Goldman Sachs had achieved happier results from earlier investments, including selling ZLink, a business park complex in the Beijing’s Zhongguancun high tech hub to Allianz Real Estate (now Pimco Prime Real Estate) for an estimated $185 million to $196 million in 2018.
After scoring some quick wins with mid-sized commercial value-add projects, such as a 2016 deal to flip a Shanghai office asset for double the purchase price from one year earlier, Kailong set out to implement similar strategies in Hong Kong’s superconducting office market of the pre-2019 era, buying up eight commercial properties for conversion into flexible offices.
88WL was one of those projects, with 303 Jaffe Road in Wanchai also among that batch.
In September last year, KaiLong put that Wanchai project, since rebranded as Konnect, up for public tender at a guide price of HK$1.25 billion. That target was 32 percent below the HK$1.85 billion asking price in a similar effort to sell the same property in 2022.
No sale of Konnect has been reported to date, with KaiLong understood to have acquired the property for around HK$1.35 billion in 2017.
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