New owner of Link Reit’s 17 Hong Kong shopping centres says rent rises not ‘winning formula’

Goodwin Gaw, chairman of Gaw Capital Partners, believes he has found the formula for making a profit from his company’s new investment in 17 Hong Kong shopping centres from The Link Real Investment Trust (Link Reit), without having to add pressure to tenants.

The Hong Kong-based Gaw Capital led a consortium with partners including US investment bank Goldman Sachs and China Great Wall Asset Management in the purchase of the malls for HK$23 billion (US$2.9 billion) late last year, the biggest ever retail property transaction in the city.

The deal immediately triggered concerns from tenants of the properties that rents would rise sharply. But Gaw said he did not believe that an immediate increase in rents was a winning formula.

“We hope to utilise our experience to evolve these malls into refreshed and renewed centres, and that will result in improved retail sales.

“For tenants, if we charge them rent based on a percentage of turnover, they can afford to pay higher rents as they earn more from the rebound of retail sales. That is the win-win business model,” he said.

He noted that while Gaw Capital needed to make profits for shareholders from the investment, as a private company it had more flexibility.

“Unlike Link Reit, we are not required to provide quarterly earnings reports to shareholders. We can take a very long-term repayment period like 10 or even 15 years. We are not under pressure to increase tenants’ rents to justify our acquisition,” Gaw said.

Link Reit sells 17 Hong Kong malls to Gaw-Goldman venture for HK$23 billion

Founded in 2005, Gaw Capital had assets of US$13 billion under management as of the third quarter of 2017. It has experience turning around commercial properties, such as upgrading 133 Wai Yip Street in Kwun Tong, Hong Kong, a former 12-storey industrial building turned modern office space.

The Link Reit property portfolio it acquired totals 2.2 million square feet of shopping centres located in Kowloon and the New Territories close to MTR subway stations, and includes more than 8,000 car parking spaces.

“The consortium was attracted by the sizeable portfolios of retail assets, they are hard to come by in Hong Kong. The portfolio also provides a lot of flexibility for upgrading,” said Gaw.

Some of the properties included in the deal are Cheung Hang in Lions Rise, Kam Tai in Lai Kok, Lei Cheng Uk Shopping Centre and Shek Lei Shopping Centre I & II.

The Gaw Capital offer was the highest that Link Reit received for the assets, beating private equity firms Blackstone and KKR and mainland Chinese investors.

Chinese bad-debt firm emerges as second-biggest partner among buyers of Link Reit’s 17 HK malls

“I have visited most of the malls. Every time, I stayed in one mall for three to four hours, tried the food in the cha chaan teng,” said Gaw, referring to Hong Kong-style cafe-restaurants.

Gaw said the company was thinking of many ideas such as adding cultural elements to revamp the malls to boost retail sales and to continue to serve local communities. These included joining hands with non-profit organisations to arrange regular activities to make use of the recreational and sports facilities at the centres.

But not everyone is as optimistic as Gaw.

“These are ageing malls burdened by low foot traffic. People are ageing in the nearby estates, ” said a tenant whose last name was Yu and has rented a tiny shop with his father selling Chinese tea in Shek Lei Shopping Centre II for more than 40 years.

“In the short-term, the new owner can probably attract more people to visit the malls after renovation. But I am not sure if they can turn it into a vibrant destination.”

Lam Siu-fai, a member of Kwai Tsing District Council, said the new consortium had sought his advice on the Shek Lei Shopping Centre upgrade last month.

“They have not yet come up with any plan and have not explained to tenants the future strategy even though they emphasise they are different from Link Reit,” said Lam.