Doubling down on Hong Kong’s long term outlook

Goodwin Gaw, 47, has made a career out of investing in real estate. In 2005, he co-founded the private equity real estate fund management firm Gaw Capital Partners, with his younger brother Kenneth to bring foreign capital into the mainland Chinese property sector. The group oversees US$10.61 billion in property investment on behalf of clients and the Gaw family worldwide. Forbes Magazine ranks the Gaw family 48th on their 2015 list of Hong Kong’s 50 Richest People with a net worth of US$1.5 billion. More recently, Gaw was in the spotlight as his family-controlled company Pioneer Global led a consortium to purchase the InterContinental Hong Kong in Tsim Sha Tsui for HK$938 million in July.

Could you tell me more about the purchase of InterContinental Hong Kong?

I am optimistic about Hong Kong’s long term outlook. We (Pioneer Global) privately invested quite a lot of money in the transaction because we reckon such a rare acquisition opportunity probably only happens once in your life. We have some long term investors who also believe in Hong Kong’s outlook. They believe this property is worth holding for 20 to 30 years. The hotel captures a spectacular view, overlooking Victoria Harbour. The harbour view is better than that you see from the Four Seasons Hotel (in International Finance Centre) on Hong Kong island.

Property consultants say it is one the most expensive hotel transactions in the world, in terms of the value per room. Was it expensive?

Many people overlook the special design of this hotel. It is rare that a 5 star hotel development has 30 to 40 per cent of space designated for restaurants. Their businesses are very good. It is almost like a retail mall but instead their retail tenants are restaurants. Excluding this portion, each hotel room is cheap.

From a different perspective, if you look at the land cost, the accommodation value cost is more than HK$12,000 per square foot. It is even cheaper than the land price in the New Territories.

The seller InterContinental Hotels Group will retain a 37-year management contract on the hotel with three 10-year extension rights, giving an expected contract length of 67 years. Is it a good deal to the seller?

Without this condition, the selling price will be a lot more expensive. Without the hotel management contract condition, many companies and developers will join the fray.

Talking about China, Chinese Premier Li Keqiang has ruled out the use of quantitative easing as a policy to help stimulate growth in the world’s second-largest economy. But will China end up with QE?

They will not impose the same kind of QE as we have seen [in the US] before. They may not issue bonds or increase money supply. But cutting interest rate is a kind of QE, relaxing lending and lowering the down payment ratio are sorts of QE.

Is it good for foreign investors?

Yes, it is. But China is a high barrier-to-entry market. If you now think it is a good time to put your money in China, it is not that easy to go in immediately because of different legal and regulatory systems. It is not easy for foreign companies to bring money in or out of China. You need to establish a team in China.

You are confident in the mainland Chinese property market. Are you in talks to buy Century Link commercial project in Shanghai owned by Cheung Kong Property Holdings? [Editor note: In August, it had been reported that Cheung Kong Property, controlled by Li Ka-shing, is selling the project for between 15 billion to 20 billion yuan.]

I think he [Li Ka-shing] is unlikely to sell it at the moment. They do not need money. But I reckon what he has been doing is relocating his assets around the world. His company is one of the few world-class Chinese conglomerates.

At a time when Chinese developers looking abroad as the mainland economy cools, why are foreign investors seeking to enter China?

I do not agree. Big players are not pessimistic about the mainland market. They go abroad because of diversification. If you look at big players China Vanke and Greenland Group, what they have invested offshore only accounts for a fraction of their businesses. Chinese state-owned enterprises such as insurance companies and developers have been increasingly venturing into the overseas real estate market as the central government encourages mainland firms to invest abroad as part of a drive to speed up the internationalisation of the yuan.

Do you expect the Chinese currency continue to weaken?

Monetary policy and fiscal policy are controlled by the Chinese government. It is hard to predict.

What are some intriguing investment opportunities overseas?

As the US economy becomes stable, buying opportunities fall. We can still find some niche properties. But if you hope to buy a building say in San Francisco or Los Angeles, do nothing and just wait for a good return, I think such games are over as interest rates head higher.

How about Europe?

Each market is too small in Europe except Britain. Their opportunities are small while the tax structure and legal structure are different in each country. Such markets are not suitable for big investment players like us. We have investment in Germany and we are constantly keeping watch on London. London is a big and deep market. As we grow, we need buying opportunities of sizeable projects. That will be found in mainland China.

Whare are some of the challenges faced by private equity funds?

There’s a lot of polarisation going on. Private equity real estate fund management firms which have a solid track record are finding it easy to raise funds. However, investors do not trust new fund managers after they got burnt in the Global Financial Crisis. I have seen some smart people leaving big private equity real estate fund management firms to establish their own fund management companies. But they often fail to raise capital.

Your company had been involved in real estate development in both the US and China, but you decided to get out. Why did back away from the business?

A: We tried this business few years ago but discontinued. The return period is long because of development cycle. In China, we cannot compete with big mainland players especially in residential market. They are too good.