Gaw Positioned to Take Full Ownership of Hong Kong Office Complex as Partner Falters

Hong Kong’s higher for longer interest rates and declining office market could be setting up private equity shop Gaw Capital Partners for a significant windfall in the city’s Quarry Bay area.

The Hong Kong-based fund manager is preparing to acquire the 35 percent stake that it does not yet own in Cityplaza Three and CityPlaza Four, a pair of office buildings on the eastern end of Hong Kong island, from its partner via a public auction, according to industry sources, who confirmed an earlier report by Bloomberg.

Gaw would be taking over the stake in the 1 million square foot (92,903 square metre) complex from Hengli Investment Holdings just under six years after it had joined the private firm controlled by investor Chen Changwei in acquiring the pair of buildings from Swire Properties in a $1.9 billion deal.

With Hong Kong’s office market facing record low occupancy, Hengli since late last year has failed to make its share of payments on a loan on the property, with Gaw Capital having covered the obligation on behalf of its partner. With that obligation continuing to be unfulfilled, the private equity firm is now positioned to take full ownership of the property.

High Interest, Higher Vacancy

Vacancy in Hong Kong’s grade A office market is hovering around the highest levels in two decades and rose to 13.5 percent in May, according to a report by JLL, up from just over 12 percent a year earlier. Office rents have now fallen 33 percent from their 2019 peak, according to the consultancy.

The market weakness, coupled with higher interest rates, creates a challenging formula for the Hengl-Gaw joint venture, which had financed the Cityplaza acquisition with a loan set up to be paid via rental income from the building, according to the Bloomberg report.

With rental income now falling short of the loan obligation on the property, Hengli has failed to cover its portion of the shortfall, helping to set up the auction event. Gaw Capital representatives declined to comment on the situation.

An auction of the property would value it at current market rates for office assets, which have fallen 30 percent since the time that Gaw and Hengli acquired the property in 2018, according to  Alex Leung, chief surveyor at Hong Kong-based CHFT Advisory and Appraisal.

Leung pointed to the Quarry Bay area as among Hong Kong’s most stable office submarkets and highlighted the HK$5.4 billion purchase of a set of 12 office floors in Swire Properties One Island East in November as underpinning confidence in the location.

“Whilst Swire remains the main landlord in Quarry Bay, the office rents in the area are more stable, and the office price therefore should drop the least among various Grade A office areas,” Leung said. “Furthermore, the acquisition of 12 office floors of One Island East by SFC provided some supports to the office price in Quarry Bay area.”

Standing 21-storeys tall, Cityplaza Three spans a gross floor area of around 448,000 square feet, while the adjoining Cityplaza Four, built in 1993, offers 556,000 square feet of office space. The joint venture has full ownership of Cityplaza Four, while ten floors in Cityplaza Three are owned by the Hong Kong government.

Hengli originally agreed to purchase the project on its own, but later turned to Gaw as a partner as Hong Kong’s office market began to show signs of weakness in 2018 and banks grew shy about lending.

At the time of the acquisition, Gaw had a 49 percent stake in the joint venture, according to a statement by Swire Properties at the time of the acquisition, with that stake since having expanded.

Extend and Pretend Nears the End

Gaw’s expected takeover of Cityplaza comes as landlords continue to struggle with office occupiers downsizing their requirements in the city.

A survey published last month by property consultancy Colliers shows that 27 percent of companies polled are looking to downsize their office footprints, up from 21 percent a year earlier.

“Challenging macroeconomic and geopolitical environments are causing businesses in Hong Kong to stay cautious about their business outlook, and in general are seeking ways to streamline their operating costs, including re-evaluation of their office rental and use of office space,” Fiona Ngan, Colliers’ head of occupier services for Hong Kong said in a statement.

While Hong Kong lenders have shown forbearance in collecting on overdue loans as the commercial property market has slid for the past four years, recent transactions show that more asset owners may be forced to sell as banks call in loans.

In April, Hong Kong-listed builder Lai Sun Development agreed to sell its 10 percent stake in the AIA Central office building in Hong Kong’s Central district to AIA Group in return for HK$1.4 billion in cash, plus assumption of debt, after losing HK$1.9 billion in the second half of last year.

That deal came after investor Francis Law Sau-fai in January sold a retail podium in Hong Kong’s Kwai Fong area to a real estate arm of state-owned China Resources Group for HK$310 million in a deal which took 31 percent of the asking price when the asset had been put on the market a year earlier.