As much as HK$100m in monthly income awaits when Hongkong Land returns full ownership of the building in 2009
The prime Hong Kong Club building in Central will be back in the club's hands when current owner Hongkong Land leaves in about three years due to an historical agreement - giving the club HK$100 million a year in rental income.
Hong Kong Club has fewer than 1,500 members - mostly senior government officials and top executives.
The unusual arrangement is considered a part of colonial history. Although no public records are available to confirm how the site was obtained, current members said it was believed that when the club was formed as a private dining and social club for government officials and British commercial seniors more than 100 years ago, the government granted the land.
The location - a Renaissance-style building with an adjoining cricket pitch at 3A Chater Road - was said to be a convenient meeting place for senior government and commercial executives during or after work.
In the 1980s the club sought to redevelop the building but limited membership meant funds were scarce.
A deal was then made with Hongkong Land, the largest property owner in Central.
With its heavy presence among the membership ranks, the company agreed to shoulder all demolition and rebuilding costs with two provisos - the four podium floors in the new tower would be kept as dining rooms and bars for the members while the top floors would be leased for normal office use. 'Hongkong Land was responsible for all the costs and it was able to recover it from the rentals,' said James Blake, a former chairman of the club.
Under the agreement, rental incomes from the office tower were to be collected by Hongkong Land for 25 years but from 2009 the club will collect all revenues and take full ownership of the building.
Hongkong Land was not available for comment.
However, property consultants estimate that the building, with an estimated vacancy rate of less than 5 per cent, provides monthly income of about HK$8.7 million or HK$100 million a year based on current net effective rent of about HK$58 per square foot per lettable floor area.
This compares to Chater House, also owned by Hongkong Land, which with its more advanced building design and specifications commands average rents of $100 per square foot a month.
'This kind of co-operation between clubhouse and property developer is not common. It happened because the club has the right to use the land but not the money or the expertise needed to develop the project,' said Pang Siu-kee, managing director of SK Pang Surveyors. 'A developer was thus called in to help taking the rental income for a specific number of years as the construction fee.'
The rental income is stable as the building is occupied by a wide range of companies and organisations including Commerzbank Hong Kong, which occupies the top two floors.
Others include United States online broker Charles Schwab which has space on the ground floor, the Institute of Financial Planners on the eighth floor and some lawyers and accounting firms.
Mr Blake said the money would be used to enhance the building's facilities and quality but gave no further details. 'We've got to use the revenue to keep the building up to the best possible standard to draw tenants,' Mr Blake said.
A club member said that a committee has been set up to study the options on using the future income and early indications are that the facilities should be upgraded.
The member said the club was considering reclaiming one office floor for its own use, preferably the fifth floor to be near the club. It also wants to take back the ground floor from Charles Schwab.
'But talks have not yet started as the building is still owned by Hongkong Land. Any talks with tenants can only start in 2009,' the source said.
Some members have suggested setting up an Asian restaurant, an expanded gym area plus redevelopment of the bar area. The lobby will also likely be renovated.
Still, with an estimated HK$100 million in rental income a year it will be hard to spend the money, and a number of members have wondered if a dividend were possible.
Such an option has been rejected by veteran members who said the club's articles banned such actions.
Property agents said the 10th floor was on the market with an asking rent of HK$58 per square foot a month.
'With the forthcoming changes in ownership, the major concern for tenants will be who will manage the building. This affects its quality,' said Desmond Poon Chi-ming, an associate director at Chartersince Surveyors.
The club's membership is a veritable who's who of the city. On its four floors of restaurants, one can easily find Chief Executive Donald Tsang Yam-kuen, Financial Secretary Henry Tang Ying-yen, most ministers and legislators as well as senior executives of big city players such as Richard Li Tzar-kai from PCCW.
A senior government official said the restricted membership and house rules - that no one can take notes or read documents inside the club areas - make the club is a favoured venue for company negotiations or tip-offs to journalists.