Hong Kong’s Wang On Adds Chevalier as JV Partner for $243M Kowloon Residential Project

Hong Kong-based developer Wang On Properties is bringing on local conglomerate Chevalier International Holdings as a partner for a HK$1.9 billion ($243 million) residential joint venture in southeastern Kowloon’s Yau Tong area as it seeks to boost liquidity and reduce its HK$4.9 billion debt burden amid Hong Kong’s housing slump.

Under the terms of the agreement, a newly-formed 50:50 joint venture of Wang On and Chevalier will acquire the project’s holding company for an initial consideration of HK$797.1 million ($102 million), including the assumption of the project’s HK$724.6 million of loans and accrued interest, HKEX-listed Wang On announced in a filing last Friday.

“We are delighted to partner with Chevalier Group to develop an integrated residential project in Yau Tong,” Wang On chief executive Nick Tang Ho Hong said in a separate release. “The Chevalier Group’s ability to strictly control construction costs and construction quality has always been highly regarded by the market. Through this joint venture, we look forward to leveraging the strengths of the Chevalier Group and the Group’s strong marketing and sales capabilities to replicate the success of the Maya by Nouvelle Project.”

The proposed transaction, which was initially announced in March and subject to shareholder approval, comes after home prices in the Asian financial centre fell 23 percent from their 2021 peak, according to data from Hong Kong’s Rating and Valuation Department.

2027 Launch

Wang On noted that the total consideration is based on a price of HK$2,732 per square foot, which references five comparable residential development land transactions in Kowloon between September 2022 and March 2024 – two in Kai Tak, two in Yau Ma Tei and one in Tai Kok Tsui – with those deals having taken place between HK$5,400 per square foot to HK$8,600 per square foot. An independent appraisal valued the project at HK$1.82 billion as of March.

In addition to the initial consideration, the JV will pay a further consideration of HK$53 million based on an excess gross floor area of 19,416 square feet, which is subject to approval by Hong Kong’s Building Authority.

Located a 10-minute walk from the Yau Tong MTR station at 18-20 Sze Shan Street, the development is expected to launch in 2027 and is set to feature a pair of 23-storey residential towers totaling 676 units, along with a 3-storey retail podium, an elderly care facility, and two basement levels of parking space.

Upon completion, the development will have a gross floor area of 30,075 square metres  (323,721 square feet), with the residential element spanning 25,037 square metres, while the retail podium and elderly care centre will measure 3,872 square metres and 1,166 square metres respectively.

The project is situated on a pair of lots registered in Hong Kong’s Land Registry as Yau Tong Inland Lot No. 30 and 31, which are currently occupied by Block 4 of the Yau Tong Industrial Building, with Wang On having received approval by Hong Kong’s Town Planning Board to convert the site for residential development.

In May 2023, Wang On took full ownership of that property for a total cost of HK$940.6 million after having initially acquired over 80 percent of the building for HK$580 million in January 2022. That acquisition two years ago took the company to the threshold across which remaining owners of the property could be forced to sell their stakes via auction under Hong Kong’s compulsory sale law.

Freeing Up Resources

Controlled by local tycoon Tang Ching Ho, Wang On expects to use the HK$524.6 million of net proceeds from the disposal for general working capital, funding the JV and other projects, as well as to boost liquidity. The company anticipates a HK$322.9 million reduction in liabilities through the deal, but expects to record no gain or loss on the disposal.

HKEX-listed Chevalier, which counts construction and engineering, property investment and development, healthcare investment and car dealerships among its business lines, sees the project as enhancing its development business in the city.

“The Directors consider that the CIHL Group’s participation in the Project through the Joint Venture would enable the CIHL Group to enlarge its land bank for property development and enhance its presence as a property developer in Hong Kong,” Chevalier said in a separate filing.

Wang On’s portfolio included 11 commercial and residential projects as of September, of which six are under joint ventures with capital partners, including US private equity giants TPG Angelo Gordon and KKR, as well as Dutch pension manager APG.

Housing Slump Persists

Once a gritty industrial area, Yau Tong has seen a number of residential projects spring up in recent years, including the 326-unit Maya by Nouvelle project, which Wang On jointly developed and launched with Shanghai-based developer CIFI Holdings in 2018 through a 50:50 joint venture.

“The average home price in the Yau Tong area is circa HK$15,000 per square foot,” said Vincent Cheung, managing director at Vincorn Consulting and Appraisal. “As the project is going to proceed with the lease modification and land premium payment process soon, it is not surprising that Wang On entered into an agreement with Chevalier to co-develop the site to share the risks and costs of the project.”

Last August, CK Asset, the developer controlled by local tycoon Li Ka-shing, sold units at its Coast Line II project located opposite Wang On and Chevalier’s project site at an average price of HK$14,997 per square foot after discounts, which at the time marked the lowest price among all new projects in urban districts since 2016, according to Bloomberg Intelligence.

A proposed Yau Tong Bay mega project with over 7,000 flats led by local developers including Henderson Land Development, Sun Hung Kai Properties, New World Development, Hang Lung Properties, and Wheelock Properties has remained in limbo since its approval by the Town Planning Board in 2013, with the consortium having reached an impasse with the government on the settlement of land premiums.

While sales of new and second-hand homes in Hong Kong reached a three-year high in April after the city’s government scrapped residential transaction taxes in February, sentiment remains sluggish and prices of mass residential homes are expected to fall another 5 percent between 2023 and 2024, according to a report this month by consultancy Knight Frank, as the mass market segment grapples with a backlog of unsold inventory that reached a record high of over 20,000 units last year.