Henderson Land Development’s Sunlight REIT is boosting its retail portfolio by picking up a three-storey shopping podium in Hong Kong’s West Kowloon area for HK$748 million ($95.8 million), with the listed trust picking up the asset at a nearly 12 percent discount to the asset’s appraised value as it expands its footprint in the Tai Kok Tsui neighbourhood.
The Hong Kong-listed trust is buying the property, which spans a gross rentable area of 58,836 square feet (5,466 square metres), from an entity controlled by local investor Francis Law Sau Fai for the equivalent of HK$12,713 per square foot at a time when Hong Kong retail asset values have fallen to fresh lows, despite the prospect for improvement in the economy as borders reopen. In addition to the cash compensation, Sunlight REIT is also taking over responsibility for shareholder loans associated with the property, according to a statement to the Hong Kong exchange.
Dubbed West 9 Zone Kids, the property changing hands is a children’s-themed mall that forms the retail portion of the 522-unit Florient Rise residential complex, with analysts hailing the deal as a sign of change in the market as Hong Kong takes down its restrictions on visitors from mainland China as well as the resilient value of community retail.
“We believe that the improving retail sentiment with the re-opening of the Mainland China and Hong Kong border will bring more potential development and business opportunities to this project,” said Peter Yuen, a managing director from Savills, whose team advised on the transaction.
Sunlight REIT’s manager believes the acquisition of the three-storey asset “will improve the geographic footprint of Sunlight REIT’s portfolio, initiate its presence in a key residential hub of Kowloon while providing complementary benefits to its retail portfolio,” according to the filing. Monthly rental income for the mall is approximately HK$2.8 million, with parking spaces included in the deal adding another HK$67,600.
The property is located in Tai Kok Tsui, a gentrifying industrial neighbourhood west of Mong Kok, near several projects owned by Henderson Land, including the Quinn Square Mile mall just blocks away. The agreed sale price is 11.9 percent less than the HK$849 million appraised value of the asset as of year-end 2022, according to a filing Wednesday to the Hong Kong stock exchange by Sunlight REIT’s manager, a unit of Henderson Land.
Completed in October 2008, the community shopping mall had an occupancy rate of 90.7 percent at the end of 2022, with a trade mix focusing on education, eateries, and other services. The REIT manager cited improving retail market sentiment as Hong Kong’s social distancing rules and restrictions on inbound travel are relaxed, noting that most of the leases at the property were actually renewed or newly let during the COVID-19 epidemic.
“Despite the challenges in the economy these years, the local consumption sector has proven to be a resilient sector. Especially the existing tenant mix which focusing on education and F&B in West 9 Zone will generate a relatively stable return,” said Jason Wo, a director with the investment team at Savills.
Sunlight REIT does not plan on making substantial renovations or improvements to the mall, which is located in a catchment area with a residential population of over 110,000. The mall is connected via footbridge to the MTR’s Olympic Station and is surrounded by office buildings and private residential communities.
Law, who is executive director of real estate investment firm Toyo Mall Limited and the second son of the late Lo Siu-tong, founder of Hong Kong developer Yu Tai Hing, had acquired the asset for HK$630 million in 2012, according to local news reports. Completion of the sale is expected on 13 April if all conditions are met.
Henderson Grows Footprint
The Tai Kok Tsui property will be joining a Sunlight REIT portfolio which already includes five retail assets in Hong Kong, alongside 11 office holdings with the complete set spanning of a total gross rentable area of over 1.2 million square feet.
Hong Kong-listed Henderson Land, the residential and commercial builder that was founded by tycoon Lee Shau Kee and is now co-chaired by his two sons Peter Lee Ka Kit and Martin Lee Ka Shing, is best known for developing or co-developing landmark properties including the city’s International Finance Centre and Beijing’s World Finance Centre.
The company has a longstanding interest in the Tai Kok Tsui area. Among its 5.4 million square feet of retail investment properties across the city, Henderson Land owns Square Mile, a shopping mall at 11 Li Tak Street & 18 Ka Shin Street. The pair of retail buildings sits less than 1,000 feet north of West 9 Zone Kids.
In mid-2017, Henderson Land paid the reserve price of HK$1.7 billion to buy out the remaining stake it did not already own in Hoi Hung Building, a 53-year-old apartment block in Tai Kok Tsui, with the aim of redeveloping the infamous building into a new, 460-unit residential project.
Retail Trade Amid Tough Market
Although West 9 Zone Kids changed hands for significantly less than its appraised value, the seller has a history of offloading commercial properties at a huge price gain.
In September of last year, Francis Law Sau Fai sold Luen Shing Building at 118-120 Queen’s Road Central for HK$298 million, more than eight times the price of HK$30.4 million he paid for the office asset in July 2002. The buyer was reported to be William Doo, the grandson of New World Development founder Cheng Yu-tung.
Back in 2018, Law sold 299 QRC, a 25-storey commercial building in the Sheung Wan area, to locally based investment firm Tenacity Group for HK$2.1 billion – quadruple the price he shelled out in 2009.
The latest deal comes at a challenging moment for Hong Kong’s malls, as the city continues to grapple with the impact of last year’s COVID outbreak, social distancing rules and travel restrictions that were only recently lifted, and lingering economic uncertainty.
The total value of Hong Kong’s retail sales in the first 10 months of 2022 was 0.7 percent less than in the same period of 2021, according to a report by Knight Frank. The brokerage added that in 2023, it expects to see a “a stable recovery trend in the retail market, but not a significant rebound,” as overall retail rents remain under pressure due to persistent high vacancies.
Retail property investment volume in Hong Kong totalled HK$1.8 billion in the third quarter of 2022, down by 11 percent quarter-on-quarter and 42 percent year-over-year, according to a market update by Colliers published in October.
The brokerage seemed more optimistic about the prospects for the retail market than Knight Frank, noting: “We believe neighbourhood malls which can provide a resilient income stream, and high-street shops in core districts which have a strong upside once the border is reopened, will create a treasure-hunting paradise for local investors in the coming months.”