Hong Kong property

Souring sentiment snares buyers of world’s costliest office tower

A decision by buyers of The Center to use bonds to finance the US$5.2 billion deal could backfire

PUBLISHED : Friday, 07 September, 2018, 8:32am
UPDATED : Friday, 07 September, 2018, 11:25pm

Four months ago, when a consortium of 10 wealthy investors settled on a financing deal by selling two tranches of 18-month bonds to raise the funds to close the HK$40.2 billion (US$5.2 billion) purchase of the world’s most expensive office tower, they felt they were sitting pretty.

They believed the innovative funding method they chose, bypassing Hong Kong’s commercial bank lending restrictions, would give them enough time to refinance, or resell some floors of the 73-storey office tower, The Center in Hong Kong’s business district, and it would deliver a chunky profit.

However, it has not worked out quite as they hoped. The dark clouds of the US-China trade war, interest rate rises and falling stock markets have combined to harm overall investor sentiment. For these investors who are bearing high interest rates through the bond issue, they are under mounting pressure to sell.

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“The market is a bit down. Fast action to sell is a wise choice,” said James Mak, district sales director at property broker Midland Commercial.

“But now they may well find financing from any bank very difficult,” Mak said. “If they do not move fast, prices will continue to drop and they could lose money on the deal.”

The consortium’s bond issue provided up to 80 per cent of the loan-to-acquisition value (LTV), doubling the 40 per cent LTV that applies to bank loans sanctioned by the city’s monetary authority.

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Arranged by Morgan Stanley, the funding package required the consortium members to put up the capital equivalent of just 20 per cent of the purchase.

The first tranche of the bond, underwritten by Morgan Stanley, had an up to 65 per cent LTV at a coupon rate of 7.5 per cent, while tranche B arranged by Hammer Capital had 65 to 80 per cent LTV with coupon rate of 15.25 per cent.

The 10 investors own different floors of the building, and some had immediately offered theirs for sale in May, straight after the deal was done, at prices as high as HK$55,000 per square foot for floors 49 and 50, according to a price list for 48 floors of the building circulating at the time.

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However, prices appear to have come down.

One of the 10 investors, Lo Man-tuen, founder of DVD and compact disc maker Wing Li Group, told the Post that he had sold the 19th floor for more than HK$33,000 per square foot, close to the estimated average price investors paid in the original sale last November.

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He said the original price he paid was HK$25,000 per square foot, so he had made a profit.

Another member of the consortium was in no rush to sell.

Ma Ah Mok, who operates Hong Kong’s biggest fleet of public minibuses, and his family currently own 13 floors.

“We currently do not have any plan to sell,” Ma Kiu Sang, Ah Mok’s son, said. “But a lot of friends have approached us and shown interest.”