US private equity firm Ares Management has made its first direct investment in Hong Kong real estate, picking up a 51 percent stake in a Kowloon office project from New World Development for approximately HK$3.07 billion ($392 million).
New World revealed the deal to the Hong Kong stock exchange late on Thursday, saying that it had formed a joint venture with a unit of Ares SSG, the local branch of the US firm, to complete a 363,392 square foot (33,760 square metre) project at 83 Wing Hong Street in Cheung Sha Wan, a former industrial area which is rapidly redeveloping as a commercial hub.
“Real estate has been one of the key sectors during our long and successful investment history across twelve Asia-Pacific markets,” said Edwin Wong, managing partner and CEO of Ares SSG in a statement. “We look forward to working with NWD and leveraging our extensive experience in real estate investing in the region.”
The investment by Ares SSG was announced just less than two months after Bryan Southergill, a former KKR executive, came aboard to lead the establishment of the firm’s real estate business in Asia and around two and a half years after Ares Management set up Ares SSG by acquiring a controlling interest in Hong Kong-based distressed asset specialist SSG Capital Management.
Strata Success in Cheung Sha Wan
“(Cheung Sha Wan district) has witnessed remarkable changes in recent years,” New World said in its filing. “Boasting excellent transportation infrastructure and ancillary facilities, its convenient location and access include an approximately half-hour drive to Hong Kong International Airport and the Shenzhen Bay Highway Bridge, promising great potential for transforming the area into a new core business district in West Kowloon.”
New World, which in recent years has taken on three major commercial development projects in Cheung Sha Wan, including the Wing Hong Street tower, will be responsible for construction, property and asset management for the development, as well as sales and marketing of units in the strata title property, the developer said in a press release.
“After completion of construction and development of the property into a commercial complex, the unit sales of such commercial complex will further strengthen the income stream of the group,” New World said, noting that it expects to book an unaudited gain of HK$450 million on the stake sale.
While Hong Kong’s office market has been locked in a three year slide which has seen capital values and leasing rates fall, New World has scored some victories with its Cheung Sha Wan strategy, including selling off around 80 percent of the space in its 888 Lai Chi Kok Road project, according to sources familiar with the project.
Located around 10 minutes’ walk southwest of the Wing Hong Street project, New World renamed 888 Lai Chi Kok Road as the NCB Innovation Centre in June this year, and had brought sales in the project to 70 percent by October of 2021. In September of last year the developer sold a set of three high-level floors in the building along with naming rights to the mainland’s Nanyang Commercial Bank (NCB) for HK$1.2 billion ($154.1 million), in a deal which valued the space at the equivalent of HK$17,500 per square foot.
The Wing Hong Street project occupies New Kowloon Inland Lot No. 6572, a site at the intersection of Wing Hong Street, Yu Chau West Street and Wing Ming Street which New World acquired for HK$2.97 billion in August 2017.
Ares’ forward purchase acquisition values the 363,392 square foot property at the equivalent of HK$16,613 per square foot of gross floor area, after New World had spent nearly HK$8,000 per square foot to acquire the land five years ago. In terms of marketable area, Ares SSG is paying the equivalent of HK$14,500 per square foot of space.
Expected to be completed in late 2023, the Wing Hong Street project is within a five minute walk of the Lai Chi Kok MTR station on the Tsuen Wan line. Of the tower’s total gross floor area, about 6,008 square feet is designated for retail, according to New World’s latest annual report.
The deal also includes an option agreement, which grants Ares SSG the right to sell its 51 percent ownership interest to New World at a maximum consideration of HK$3.46 billion, should “trigger events” (including a breach by New World in obtaining pre-sale consent for strata title sales at the property) take place before the required completion date for the project of 30 June 2024.
In addition to the Wing Hong Street and 888 Lai Chi Kok Road projects, New World also in 2017 acquired a commercial site on King Lam Street, located two blocks west of 83 Wing Hong Street, with that project listed in its 2021 annual report as still under construction.
Monthly rents for new offices – such as New World’s NCB Innovation Centre – fall in the region of HK$32 to HK$35 per square foot of gross floor area, said Alex Leung, senior director at CHFT Advisory and Appraisal. Which have less favourable locations and specifications, such as the China Shipbuilding Tower and Billion Plaza, have asking rates of about HK$25 per square foot per month, said Leung, who noted that office rents in the area were stable over the last 12 months.
Sell Hong Kong, Buy Mainland
Including its deal with Ares SSG, New World has put on the market at least HK$13 billion worth of commercial assets so far this year, according to Mingtiandi’s tally. Assets the company is making available include the D Park shopping centre in Tsuen Wan, which the developer is marketing for HK$6 billion.
In August, New World chief executive Adrian Cheng declared that China’s real estate market had reached its lowest point and vowed to spend RMB 10 billion ($1.5 billion) to buy land in top-tier mainland cities such as Shanghai, Guangzhou, Hangzhou and Shenzhen over the next 12 months.