Wheelock and Co and subsidiary The Wharf (Holdings) have agreed a land premium of HK$7.9 billion to renew the lease of Ocean Terminal in Tsim Sha Tsui for another 21 years, removing the uncertainty hanging over the property.
There had been doubts about whether the government would renew the lease on the property, an important revenue source for the two companies.
Harbour City, part of Ocean Terminal, is the city's most popular shopping destination for mainland tourists. Its rental income has grown significantly in the past few years in step with the increase in tourist arrivals from across the border.
The companies yesterday announced they had accepted the offer from the Lands Department to renew the lease. The current lease expires on June 16.
They will need to pay an annual rent to the government of 3 per cent of the site's rateable value. The rateable value, which is the value of the property as determined by the government, for the financial year to March 2013 is estimated to be around HK$491 million. Wharf and Wheelock will have to pay the levy by June 12.
It would be paid from Wharf Group's internal resources, bank and other borrowings, the announcement said.
Wharf's flagship development comprises shopping malls, offices, serviced apartment and hotels. Ocean Terminal is a key component of Harbour City, but the site is owned by the government, unlike the rest of Harbour City.
Ocean Terminal's net rental income jumped 26.5 per cent to HK$587 million last year.
Adrian Ngan, an analyst at Citic Securities International, said in a recent research report that Wharf should be able to increase its rental income from Ocean Terminal by improving its layout and design to increase the space that can be let out.
'The renewal of the lease provides more flexibility for the company to reshuffle its tenant portfolio in Harbour City to maximise overall rental income,' he said in the report.
Ngan estimates that Wharf's net gearing ratio - a measure of a company's financial leverage - will increase from 21.4 per cent at the end of last year to 26.3 per cent by the end of this year after the company pays the land premium.
With a strong and steady income from investment properties and revenue from property sales, he believes there is no urgent need for equity fund-raising.
'But if property sales on the mainland slow significantly due to poor market conditions, Wharf's cash flow will come under stress, which could push its gearing higher.'
Shares of The Wharf rose 1.53 per cent to HK$39.80 yesterday, while Wheelock's were up 1.51 per cent at HK$23.60.
The percentage increase in Ocean Terminal's net rental income last year