Hong Kong office towers put on the block amid loan-payment conflict between owners

The owners of two grade-A office buildings on Hong Kong Island, known as Cityplaza Three and Four, are putting the towers up for sale amid a financing disagreement, five years after buying the assets for HK$15 billion (US$1.9 billion) at a market peak.

Hong Kong-based firms Gaw Capital and Hengli Investments have appointed Savills and JLL to sell 12 and 14 Tai Koo Wan Road in Eastern district. Gaw, a private equity firm, currently owns a 65 per cent stake in the properties, while real estate investment firm Hengli holds the remaining 35 per cent.

The adverse conditions have hit a HK$10.3 billion loan that Gaw and Hengli took out, backed by the Taikoo office buildings. With rental income insufficient to cover the interest payments, the two companies have had to inject equity into the borrowing entity of the loan, based on their respective stakes, to cover the shortfall, according to people familiar with the matter. However, Hengli has not paid its part since late last year amid liquidity issues and tight rental income, the people said.

The sale will indicate a market price that could force Hengli to sell its stake and allow Gaw Capital to take more ownership of the properties, according to one of the people.

The two office towers have a total gross floor area of 788,095 sq ft. The tender closing date is September 20 and the buildings will be offered at a discount to the acquisition price, according to a sales brochure seen by the Post.

The sell-off may be due to tightening credit conditions imposed by Hong Kong banks. The transaction for the buildings took place at a market peak, said Mark Leung, UBS’s greater China property research analyst.

“Now, with rent decreasing by 30 to 40 per cent, no capitalisation rate expansions occurred, leaving the book value at a mere 3.0 per cent cap rate,” he said. “If the cap rate increases by 1 per cent, valuation will further decline by 25 per cent.”

Typically, banks stick to a loan-to-value ratio of 60 per cent. But in this case the asset has dropped to 44 per cent of the original value, considering cap rate expansions and rent declines over the past few years, Leung said, adding that this situation has led to a “negative equity” scenario for the project loan.

“With net rental income alone, interest expenses cannot be covered,” Leung said. “Banks may decide against renewing the loan when the loan expires. The eventual outcomes are either the banks seizing the properties or the borrower selling off the assets at significantly reduced prices.”

A spokesperson for Gaw Capital declined to comment. Hengli did not respond to emails sent to addresses on its website, phone calls made to its Fuzhou office, the only listed number found on its website, nor messages sent via WeChat. LinkedIn messages to Hengli’s chief investment officer in Hong Kong went unanswered.

Gaw and Hengli acquired the two 22-storey office towers from Swire Properties in 2019 for HK$15 billion, representing an average price of around HK$19,350 per square foot. A bank-syndicated loan of HK$9.78 billion backed that acquisition, according to Bloomberg data.

Hengli, owned by Chinese tycoon Chen Chang-wei, has developed residential and commercial projects in mainland China and managed properties in mainland China, Hong Kong and London, according to its website. Chen is also a shareholder in Hong Kong-listed Wanda Hotel Development, according to the firm’s annual report.