With market conditions deteriorating by the day and investors running scared, selling a mature property portfolio with promises of expansion into the mainland was never going to be an easy proposition.
So perhaps it should have come as small surprise yesterday when venerable conglomerate Swire Pacific scrapped the HK$21 billion stock market flotation of its real estate arm, Swire Properties, in the face of wilting demand.
Back in early November, when Swire first proposed the offering, the environment looked very different. The commercial real estate market in Hong Kong was rebounding vigorously, and on the mainland, the sky appeared the limit for a property sector revitalised by Beijing's massive stimulus efforts.
More to the point, international investor sentiment was riding high. As brokerage analysts competed to issue ever more bullish forecasts for the stock market's performance this year, asset managers were pouring funds into Hong Kong equities.
With the Hang Seng property index of developers and landlords up 99 per cent from its trough in March last year, and Swire shares trading at a discount to their net asset value of just 14 per cent - narrow compared with their long-term average discount of 25 per cent - the time looked ideal to spin off the company's real estate arm.
Swire duly seized the opportunity, announcing plans to float Swire Properties, owner of a portfolio of top-notch office and retail developments including Pacific Place, much of Quarry Bay and the Sanlitun Village development in Beijing. The proceeds would be used to pay down debt and fund Swire Properties' expansion into the mainland market.
These things take time to arrange, however, and by the time the stock exchange listing committee gave its go-ahead to the proposed deal last month, sentiment was already crumbling.
With fears growing that the Chinese economy had overheated and that a dangerous bubble had inflated mainland property prices, investors had begun to revise their expectations for the Hong Kong market early in the new year, and fund inflows had abated.
Then, as Beijing rolled out a series of restrictions intended to clamp down on real estate speculation and damp price rises, investors turned actively bearish.
The announcement by mainland banks of plans to sell between US$40 billion and US$50 billion in new shares to replenish their depleted capital ratios only made matters worse, with the expected supply of paper weighing heavily on the stock market.
By yesterday's close, the Hang Seng property index was down 15 per cent over the past month (see the first chart below).
As a result, when it was finally announced, the pricing of the Swire Properties offering looked wildly optimistic, if not plain greedy. At between 32 and 36 times estimated earnings for this year and at a discount to net asset value of between 8 and 16 per cent, Swire's valuation was eye-wateringly expensive. In contrast, Hongkong Land Holdings is trading at a price to estimated earnings ratio of 16 and at a discount to net asset value of 25 per cent.
And given the shaky state of the Chinese market, Swire's plans for an expansion of its mainland property business, together with its admission that Hong Kong rental increases will stall this year, hardly made the deal sound enticing.
Add to all that a sharp increase in investor risk aversion in response to the Greek debt crisis, and it is hardly surprising that the buyers failed to roll up. Yesterday, Swire scrubbed the deal, blaming 'the recent sharp deterioration in market sentiment'.
Perversely, however, the news is not all bad for shareholders in parent company Swire Pacific. With the property arm - which generated 75 per cent of its profits last year - spun off, Swire Pacific would have resembled a holding company more than a landlord, and holding companies typically trade at an even deeper discount to net asset value than pure property plays.
As a result, following the deal's announcement, investors began to rerate Swire Pacific and mark it down accordingly (see the second chart).
With the Swire Properties offering now scrubbed and unlikely to be revived for the foreseeable future, there is a chance that investors may begin to see some value in the parent company again, once the present market turmoil has quietened down.
It is not much of a consolation, but at least it is something.