Feature: Hong Kong's PCCW Tower explored

Hong Kong property company Swire Properties’ sale of a 50 percent stake in the PCCW Tower in Island East to Grosvenor earlier this month was the second investment involving the same building in less than two months.

After exercising a pre-emption right in September to buy back an 80 percent stake in the tower, originally agreed at its sale to Parsippany, New Jersey-based Pramercia Real Estate Investors (PREI) in 2004, Swire sold a 50 percent position in the building to London-based Grosvenor. The two sales represented one of those rare occasions where the deals reflected the strategies of all the parties involved.

For Swire, the firm wanted to control a larger position in the office, originally developed in 1994 for Hong Kong telecommunications business PCCW.  The firm, one of Hong Kong’s largest landlords with more than 17.8 million square feet of office space under management in the city, also sought an investment partner able to hold the asset on a longer-term basis and not for a shorter term typical of many funds.

Opportunities to acquire really good quality assets in Hong Kong come up rarely, as they typically are owned by local property companies that rarely want to sell Nick Loup, Grosvenor

Pramerica, which had purchased the 80 percent stake in the building for HK$2.8 billion (€265 million; $361 million) on behalf of a core-plus Asia vehicle managed by its Munich-based arm, Pramerica Real Estate International, was able to garner ‘double digit’ returns by selling the asset back to Swire for HK$3.2 billion six years later. Pramerica reportedly was keen to exit the asset since 2008, but worsening lending conditions owing to wider economic conditions coupled with Swire’s pre-emption right, which meant any new investor would not have autonomy over the asset, put potential buyers off.

However, in its announcement on the exit, PREI portfolio manager Martin Sloss, said: “Given the highly volatile nature of the real estate market in Hong Kong and the significant size of the investment, this was the right time to take advantage of the return of investor and banker confidence in the Asian market, which has recovered since the financial turmoil began.”

With Pramerica out, Swire’s search for an investment partner that would enable it to have an increased position and that would be committed for the longer haul was brief. A spokesman at Swire admitted there was no replacement investor in the frame when it bought back the majority stake from Pramerica. But he said the search for a ‘quality’ investment partner in Grosvenor did not take long.

Grosvenor emerged purchasing a 50 percent stake in the tower on a valuation of HK$4.39 billion (€414 million; $566 million) – effectively a ‘small margin’ on the valuation of Swire’s deal with Pramerica, said chief executive for Asia Nick Loup. He told PERE: “From our point of view, we’d been looking at the office market in Hong Kong for a while and wanted to acquire something we could regard as a long-term investment. Opportunities to acquire really good quality assets in Hong Kong come up rarely, as they typically are owned by local property companies that rarely want to sell.”

Grosvenor runs a series of real estate investment funds in Asia, including a Chinese retail vehicle, but this investment was made using capital from its balance sheet, thus giving the firm the commitment longevity it, and Swire, required.

Loup said Grosvenor wanted for a while to invest in  the ‘best decentralised office location in Hong Kong’. Of Swire, he said: “They have a long-term plan to continue to improve the critical mass and the facilities in the area. So here was a chance to add incremental value over a period of time.”

A quick glance at Hong Kong East’s fundamentals would appear to support this view. According to Jones Lang LaSalle data, the office vacancy in the area was 2.9 percent at the end of the first half of the year, the lowest rate among Hong Kong’s submarkets. This will have been a factor behind rental increases of 224 percent between the fourth quarter of 2003 to the third quarter of 2008, peaking at HK$33.70 per square foot. While the global economic downturn saw rents tail off 23.6 percent, bottoming out at HK$25.70, they since have increased to HK$26.90 at the end of the first half this year.