HONG KONG : Hong Kong’s New World Development is talking to investors about the sale of a majority stake in an office tower under its premium K11 brand as it disposes of non-core assets to fund its rapid expansion, two people with direct knowledge of the matter said.
The Grade-A K11 Atelier King’s Road tower in eastern Hong Kong island from the city’s fourth-biggest developer is valued in its entirety at HK$11 billion ($1.4 billion), according to the people.
To attract investors and sell at a good price, New World is offering a guaranteed capitalisation rate – a measure associated with rental yield – of around 4 per cent under a deal structure similar to the sale of a land plot last year, the people added. They spoke on condition of anonymity because the talks were private.
Previous big disposals by New World had raised liquidity concerns and contributed to a sell-off in bonds in the developer, which is majority-owned by local conglomerate Chow Tai Fook Enterprises and more highly leveraged than peers. The bonds have since largely recovered in price after the developer repurchased notes worth HK$6.5 billion.
New World said in a statement to Reuters that it had no plans to sell a stake in K11 Atelier King’s Road, though it was common practice to exchange views with investors on business sentiment, valuation and potential investment opportunities.
“The K11 Atelier King’s Road is not amongst our flagship portfolio,” it said. “New World Development also has no interest in selling any other K11 properties. We are in a very strong liquidity position with robust cash reserves.”
K11 Atelier King’s Road was listed as a standout financial performer in an investor presentation in September, with operating profit up 35 per cent year-on-year.
Hong Kong’s top developers have enjoyed decades of lucrative returns in one of the world’s most expensive property markets, but falling property sales and rents in both mainland China and the global financial centre, as well as rising interest rates are putting pressure on the sector.
“New World’s capex is bigger than many other developers, and it makes sense to recycle capital by disposing assets that have less potential to grow its portfolio,” said Will Chu, a Hong-Kong based analyst at CGS-CIMB Securities.
DIVIDEND RATE GUARANTEED
The people told Reuters that any disposal of K11 Atelier King’s Road is expected to model the sale of a 51 per cent interest of a commercial land plot in western Kowloon to alternative asset manager Ares SSG last September, under which New World provided a 5 per cent dividend rate for four years.
Details of the guaranteed rate have not been reported previously.
The guarantee allowed New World to sell at a higher-than-market HK$3.1 billion, booking a HK$450 million gain, and supported the valuation of its nearby projects for sale, the people added.
Ares SSG declined to comment.
A similar structure is also being offered to investors to buy D-Park, a shopping mall worth HK$6 billion on a 100 per cent basis, the people said.
New World is not financially distressed according to the people, along with a third person who deals directly with the developer, but it needs more cash to support its rapid expansion.
The developer’s gearing ratio was 43.2 per cent at the end of June, versus a Hong Kong industry average of around 20 per cent. If its perpetual securities were classified as debt, the ratio would rise to around 70 per cent.
The company plans to add 21 K11 projects in Hong Kong and mainland China by 2026 for a total of 38, it said in September. It also forecast its average financing cost would rise to 4.5 per cent this financial year from 2.5 per cent last year, adding HK$1.2 billion in costs.
New World sold HK$31.9 billion worth of non-core assets in the 2021 and 2022 financial years, and plans to sell another HK$25 billion in the next two years to raise capital for opportunities in the Greater Bay Area, it said in September.
($1 = 7.8349 Hong Kong dollars)