Gaw and Goldman Team Up to Buy 17 Link REIT Retail Centers for $2.9B

Hong Kong’s Gaw Capital has made itself a major player in Asia’s real estate investment scene and now the family run private equity firm has teamed up with a consortium that includes US investment bank Goldman Sachs for its biggest acquisition ever.

The Gaw-led consortium signed agreements today with Link Asset Management to dispose of 17 Hong Kong retail properties for a total consideration of HK$23 billion ($2.9 billion).

“As sizeable portfolios of such high-quality retail assets are hard to come by in Asia, the sale attracted overwhelming interest from international investors, including global and regional private equity funds, sovereign wealth funds, as well as local investors,” said George Hongchoy, Chief Executive Officer of Link Asset Management Limited, the manager of Link REIT in a statement.

The Gaw-led team pushed aside rival bids from Blackstone, KKR and Citic Capital to buy the fleet of malls, according to local media reports.

Hong Kong’s Biggest Retail Deal Ever

The transaction sets a new record for an acquisition of Hong Kong retail properties, and would be the third high water mark of the year for the city’s real estate market. Henderson Land bought the city’s most expensive development site for $3 billion in May, and Li Ka-shing’s CK Asset made the city’s biggest ever sale of a commercial property early this month with its $5.1 billion sale of the Center on Queen’s Road.

“We and our partners strongly believe in Hong Kong’s future, and believe these malls, which Link REIT has done an excellent job in upgrading and maintaining, will continue to serve important functions in the community,” Goodwin Gaw, Chairman and Managing Principal of Gaw Capital Partners, said in a statement.

The Gaw offer was the highest that Link REIT received for the set of community retail centres, and represents an approximate premium of 52 percent on the appraised value of the portfolio as of 30 September 2017 and a net disposal gain of approximately HK$7.4 billion, according to Link Asset Management.

At the rate that the new owners are paying for the portfolio’s 2.2 million square feet (204,000 square metres) of retail space and over 8,000 car parking spaces, the assets would have a cap rate of just 2.9 percent based on the properties’ net operating income, according to industry analysts familiar with the transaction who spoke with Mingtiandi.

HSBC and UBS acted as financial advisors, while Cushman & Wakefield brokered the real estate transaction on behalf of Link REIT.

Malls Could Be Set for an Upgrade Under New Owners

The retail deal is the latest in a crescendo of acquisitions led by Gaw in recent years after the company had already raised nearly $2 billion for new investments in Asia by early this year. Gaw would be the largest investor in the consortium, with Goldman said to be taking less than a 20 percent stake, according to a report in Bloomberg.

The winning bid from Gaw and Goldman would give the investment consortium ownership of a set of community malls and shopping plazas connected to metro stations in Kowloon and the New Territories, including locations in Tuen Mun, Ma On Shan and Kwai Chung districts. Most of the properties are valued at over $500 million.

“We hope to utilize our experience to evolve these malls into refreshed and renewed centers of local life, and look forward to working with the community to make their neighborhoods better homes,” Goodwin Gaw commented in the statement. The low rate of return based on the properties current income make it likely that the new owners will seek to reposition and refurbish the malls to enhance current rental income.

Link REIT Sells Away Its Troubles

The deal would be the second major transaction this year between Gaw and Link REIT, after the trust managed by former DBS banker George Hongchoy bought a Guangzhou mall from funds managed by Gaw and Morgan Stanley in April for RMB 4.1 billion.

The sale of the portfolio of community malls would also free Link REIT from public relations burdens associated with managing a set of properties that made Asia’s largest real investment trust a target of criticism. Link REIT had reportedly put the properties on the market in August after undertaking a strategic review of the trust’s performance in July of this year.

Link REIT, which was set up to create commercial value from properties formerly owned by the city’s housing authority, owns 155 retail centres in Hong Kong, most of which were built to cater to the needs of residents of the city’s public housing projects. The REIT has faced repeated criticism from groups opposed to the commercialisation of these retail centres.

In mid-2016 the trust disposed of seven retail assets for a total of HK$1.96 billion, and in December last year sold off five more retail properties for HK$3.64 billion.

More Money for More Acquisitions

Following the disposal of the 17 properties, Link will have about 90 percent of its HK$175 billion assets in Hong Kong and 10 percent in Mainland China. Link REIT has been steadily building up a team of mainland property specialists, and has bought commercial assets worth over RMB 13.2 billion on the mainland since early 2015.

Proceeds of the sale will be used for new investment opportunities in Hong Kong and first-tier cities in mainland China, according to a statement by Link Asset Management, in addition to being used for general working capital purposes including debt repayment and potential unit buy-backs. Completion of the disposals is set for 28 February 2018.