Money Matters

Why Henderson Land’s ‘Uncle Four’ spent record US$3bn on Murray Road land plot

PUBLISHED : Wednesday, 24 May, 2017, 8:04am
UPDATED : Wednesday, 24 May, 2017, 8:04am

All sorts of theories have been offered on why Henderson Land Development bought the Murray Road land plot at a world record price.

Some say Henderson was bidding for some inconvenient buyers, others that Henderson would soon sell a stake in the plot to mainland peers.

That is because the HK$24 billion (US$3 billion) price tag, which implies a yield of only 2.5 per cent, is simply too high for most people to understand.

The most interesting explanation offered to Money Matters is to do with Henderson chairman Lee Shau-kee, nicknamed “Uncle Four”.

The tycoon is said to have brought up the land sale in a regular chat with his top lieutenants weeks before the bid. “That land is good stuff,” he said, according to a source familiar with the conversations.

No price range was given and no calculus was shown. Yet, his team knew it was a must have.

Henderson pays US$3 billion for world’s costliest land plot at Murray Road in Hong Kong

They have little reason to challenge their boss. This is the man who, together with Sun Hung Kai’s former chairman Walter Kwok, defied strong in-house opposition to buy harbour front land which became the prestigious International Financial Centre.

It was a bold move back then. The land premium was HK$30 billion. It was a year before the handover of Hong Kong’s sovereignty to China. The project would take at least five years to materialise.

The bet more than paid off. On top of the value appreciation, Henderson’s 40.77 per cent in the IFC generated HK$2 billion in rent, or 15.6 per cent yield, in 2016.

The 89-year-old tycoon had every reason to snare the Murray Road site. It would give Henderson full control of one of the last two remaining A grade office sites in the heart of Hong Kong. Lee’s local peers have got theirs already.

Meantime, rival mainland developers are eating into the market share of Hong Kong developers in residential properties.

There are rumours that Beijing had asked its boys to stay away from the Murray Road site

Uncle Four certainly had the will to win. The big question is why his mainland rivals allowed it to materialise.

A week before the bid, analysts were almost unanimously betting that the Murray Road land would go to a mainland corporate, given their jaw dropping aggressiveness.

In the end, only two mainland developers put in a bid. Why? Money and politics may explain.

Let’s start with money. HK$24 billion is not a big sum for mainland enterprises. Beijing’s tightening of capital exodus is more a matter of inconvenience than a deal breaker for a well-connected corporate. The question is whether the money should be spent in Hong Kong.

Mainland developers opted for residential properties instead. They love the hit and run game in that market. Put in a bit of money to buy the land; leverage up with the land; spend the loan on another piece of land; sell the apartments within two or three years and so on and so forth.

Investment properties, in particular prime offices, are too long term a game for them.

Very often the land lease prohibits any break up sale of the finished building, like the one on the Murray Road plot. Where a break up sale is allowed, it results in a management issue and usually means a downgrade in value of the separated building.

Thank you Henderson: Record Murray Road price lifts property values in the neighbourhood

Building prime offices requires management expertise and ties up capital, offering limited leverage. It is not mainlanders’ cup of tea. Given the high political and policy uncertainties back home, who would blame them.

Therefore, while mainland developers have been scrambling for residential land in the past few years, their presence was rarely seen in the non-residential area.

What about the top state banks and insurers? Money should not be a big concern. Building a headquarters in the heart of Hong Kong would be very satisfying for the ego of many chairmen.

It could even be dressed up as a vote of confidence in Hong Kong. Remember the building of the Bank of China Tower?

It was 1982. Hongkongers ran for the door after state leader Deng Xiaoping told the then British Prime Minister Margaret Thatcher the city must rejoin the motherland by 1997.

The political scene is very different now. There are rumours that Beijing had asked its boys to stay away from the Murray Road site given the increasing complaints about mainland money pushing up the city’s housing prices. But this can never be confirmed.

However, given tensions in the corridors of power, it would be safe to say that none of the mainland big boys would dare to battle for such a high profile site without blessing from the top. Don’t stick your neck out is the survival trick nowadays.