Chinese firm eyes "strata-sales", high debt for flipping Hong Kong towers

Swire Properties

29/06/2018 07:28

* Office tower buyer in talks for 80 pct financing - sources
    * Buyer considering selling floors of the towers - sources
    * Model is sale of Li Ka-shing skyscraper - source

    By Clare Jim
    HONG KONG, June 29 (Reuters) - A Chinese company plans to
emulate a risky property strategy in Hong Kong that was used
last year to buy a skyscraper from the tycoon Li Ka-shing,
taking on a high degree of debt and selling off individual
floors before the transaction closes.
    Henglilong Investments Ltd is hoping to borrow 80 percent of
the $2 billion cost of a deal to buy two office towers, and sell
certain floors of the buildings separately, according to three
sources with knowledge of the matter.
    The deal would be similar to one employed by a consortium
that bought The Center skyscraper from Li last year for $5.2
billion.
    The floor sales - known as "strata-selling" - would allow
Henglilong to pocket profits quickly and repay the high-interest
debt, the sources said.
    The speculative strategy is likely to further push up Hong
Kong's already sky-high property prices, market experts said,
and could hurt the long-term asset value and management quality
of Grade-A office buildings.
    The strategy remains rare in Hong Kong premium property
deals, but one of the sources said more investors were ready to
jump in if The Center deals closed as planned.
    "Many people in the market want to copy The Center deal
because it's lucrative," the source said. "They are waiting to
see whether parts of The Center can be successfully divested as
planned."
    Henglilong last month agreed to buy Cityplaza Three and
Cityplaza Four, about a 15-minute drive from the central
business district, from Swire Properties  1972.HK .
    The company is in talks with investment banks, including
Morgan Stanley and Goldman Sachs, to borrow 80 percent of the
deal value via a private bond sale, two of the sources in the
financial industry said.
    The financing and selling plans were not final, the sources
said, adding that it was unclear whether Henglilong was studying
other options before the deal is completed in April 2019.   
Henglilong could not be contacted for comment.
    Buyers of The Center were asking for as much as HK$55,000 
($7,008.51) per square foot, much higher than the HK$33,000
average cost implied by the total price tag.
    No floor sales have been officially completed yet as
potential buyers - mainly Chinese financial institutions - have
put purchase plans on hold, wary of scrutiny by Beijing, which
has been cracking down on overseas property purchases. 
    "We're ready to buy for our office use, but we're waiting
for a state-owned company to make the move to buy first," said
an executive of a Chinese financial company. "We don't want to
be in the headlines again saying Chinese companies are fuelling
Hong Kong property prices."
    The financing strategy has also come under scrutiny from
Hong Kong regulators, who restrict commercial banks from lending
over 40 percent of the property value to first-time commercial
property buyers.
    However, the Hong Kong Monetary Authority only has the power
to govern the financing activities of licensed banks, not
investment banks.
    After Reuters reported last year that the buyers of The
Center planned to borrow as much as 90 percent to fund the deal,
HKMA instructed commercial banks not to lend to them, according
to two sources with direct knowledge.  urn:newsml:reuters.com:*:nL3N1OB1VO
    As a result, the consortium had to resort to a private bond
sale with much higher interest rates - 7.5 percent for the
senior tranche and 15.25 percent for the mezzanine tranche in
the first year - than a bank plus mezzanine loan structure it
had first pursued.  urn:newsml:reuters.com:*:nRLP73070a
    Rates for Henglilong are expected to be lower, however, as
many investors are looking to get involved in mezzanine
financing after The Center deal, one source said.

($1 = 7.8476 Hong Kong dollars)

 (Additional reporting by Anne Marie Roantree and Venus Wu;
Editing by Philip McClellan)
 ((clare.jim@thomsonreuters.com; +852 2912 6653; Reuters
Messaging: clare.jim.thomsonreuters.com@reuters.net))