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  • Apr 25, 2014
  • Updated: 5:22pm
Jake's View
PUBLISHED : Sunday, 26 August, 2012, 12:00am
UPDATED : Sunday, 26 August, 2012, 4:47am

A reit one way to fund a third runway, but it's unlikely to be accepted

I have the answer to funding of the new third runway at the airport. It's a simple idea, won't cost the taxpayer a dollar and we can still include all the fancy bits that will help keep pink dolphins pink.

What we shall do is take the ancillary income of the airport and float it on the stock market as a real estate investment trust (reit). It would yield easily enough money to pay for the luxury version of the third runway with a good dollop of cash left over.

To see how it could be so, just look at the table taken from the airport's latest accounts. Retail licences and advertising revenue are by far the largest component of revenue. That's the maze you have to traverse to get to your flight, shops full of overpriced things you would probably wouldn't buy, but are irresistible to the cousins across the border.

Now add the airside service support franchises. These provide a very consistent stream of income and there is no reason that we cannot capitalise them and include them in our reit.

I don't know what other terminal commercial revenue comprises but it's commercial and so in the pot it goes. Finally, there is real estate revenue. It's not explained, but I assume this item comprises net rental income, not development profits. It's reit material.

We are now at an annual revenue stream of HK$7.48 billion. The interesting thing is that there are almost no costs to deduct. I suppose we could take in amortisation on the portion of the terminal building occupied by the shops but that's small. We are really looking at net revenue.

Now let's float all this in a reit that we advertise as yielding 5 per cent a year. It would value this income stream at just a sneeze short of HK$150 billion and HK$130 billion is the maximum figure anyone has yet proposed for construction of that third runway.

Now the questions. Would people buy it?

You bet they would. Line me up. I would have some in a flash, would just jump for a big blue- chip asset that returns me 5 per cent a year of hard cash in my hands. There is nothing like it to be seen in this town.

I would readily take 4 per cent, given that this would be an inflation-proof investment. If the prices of retail goods go up, so will retail rents, right in tandem, and the reit's income will rise without further investment.

Unfortunately, we cannot sell all of this reit to the public. We shall have to leave at least a third in the airport authority's hands or else it will see no post-flotation benefits in a reit and just cheat the reit holders whenever it can. But no matter, we shall still raise HK$100 billion in the reit and the rest can easily come from a bond issue.

Second question: would the Airport Authority consider it ?

Of course not. Don't be silly. The airport authority is a captive prisoner of the airlines and they'd howl in protest. They have it all their way. The airport operates at a loss on air operations. Only the shops and other commercial operations bring it back into profit.

But somehow - don't ask me how - the airlines have fooled our government into thinking that shopping malls and air transport are the same business and it should all be looked at as one till. The airport shops hollow out the business of shops in town but that's ignored.

If my reit proposal were adopted, this sweet deal for the airlines would be exposed and they would have to pay a fair market rate for using our airport.

It will never happen. Sorry for wasting your time.

jake.vanderkamp@scmp.com

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