Hong Kong property

China-backed buyer seeks loans to fund HK$40.2b purchase of Li Ka-shing’s The Center tower

Beijing-backed company willing to pay 8pc for mezzanine financing

PUBLISHED : Tuesday, 12 December, 2017, 9:31pm
UPDATED : Tuesday, 12 December, 2017, 10:16pm

The China-backed buyer of a Hong Kong skyscraper from billionaire Li Ka-shing for a record HK$40.2 billion (US$5.14 billion) is seeking to borrow as much as 90 per cent to fund the deal, according to a term sheet seen by Reuters and people with knowledge of the matter.

The unusually high leverage level reflects a growing appetite from new mainland China buyers who are willing to pay a high price to get into the Hong Kong property market, at a time when many traditional local players are selling and investing overseas.

Li’s CK Asset Holdings said last month it was selling The Center, a 73-storey office tower, to C.H.M.T. Peaceful Development Asia Property, in the world’s biggest single property sale which would bring in a HK$14.5 billion gain.

Beijing-based China Energy Reserve and Chemicals Group Properties owns 55 per cent of C.H.M.T. Peaceful Development, while the remainder is held by a few Hong Kong investors.

Li Ka-shing sells The Center in US$5.15 billion record deal

The buyer of The Center is looking to raise around 40 per cent of the $5.15 billion in one-year mezzanine financing by offering to pay 8 per cent interest, the term sheet showed. The remainder of up to 50 per cent will be raised in the form of a senior loan, said four people, three of whom were bankers involved in the deal.

“It’s a sign that there’s a lot of new entrants in the Hong Kong market from the mainland, and the buyers are names people aren’t so familiar with,” said Stuart Jackson, chief executive officer of InfraRed NF Advisers, an Asian real estate investment manager.

“[At the same time] it seems to be a trend that Hong Kong players are selling and investing overseas … the level of substitute capital from the mainland has been more than sufficient to compensate, so for now prices continue to go up.”

C.H.M.T. Peaceful Development could not be immediately reached for comment.

Most property buyers in Hong Kong borrow about 40-50 per cent of the deal value to finance their acquisitions, according to industry experts, and the use of mezzanine loans is not common.

Mezzanine loans command much higher interest rates than other types of loans because they require minimal collateral. Property related mezzanine loans carry interest of between 6 per cent and 10 per cent in Hong Kong.

Will Hong Kong rents soar higher after The Center’s record sale?

Because banks in Hong Kong are restricted from lending more than 50 per cent of the transaction value, the mezzanine financing is likely to be provided by fund houses. The consortium has until March to finalise the mezzanine financing, according to the C.H.M.T term sheet.

C.H.M.T. has already paid a 10 per cent deposit. Because of the high coupon and the low investment yield in Hong Kong, mezzanine loans are usually used as bridge financing. Local media has reported that C.H.M.T. Peaceful Development is planning to flip the investment by selling part of the building.