AIA Central in Hong Kong’s Central district (Image: AIA Group)
Hong Kong-listed builder Lai Sun Development has agreed to sell its 10 percent stake in the AIA Central office building in Hong Kong’s Central district to AIA Group in return for HK$1.4 billion ($181.5 million) in cash, plus assumption of debt, as it seeks to strengthen its financial position following a HK$1.9 billion ($237 million) loss in the six months ended January.
The transaction announced Monday by Lai Sun and its parent firm, Lai Sun Garment, values the 38-storey tower overlooking Victoria Harbour at HK$17.8 trillion, with the HKEX-listed insurance giant taking full ownership of its headquarters for the equivalent of HK$1.8 trillion.
“While the Agreed Property Value of HK$17,750,000,000 represents a discount to the property valuation, each of the LSG Board and the LSD Board has taken into account the prevailing and expected market dynamics under which deviations from property valuations are frequently observed,” Lai Sun Development said in the announcement. “In light of these factors, each of the LSG Board and the LSD Board considers that the discount is both equitable and justifiable. The Disposal enables the Vendor to realise the value of property investment, thereby enhancing the cashflow and financial position of the LSG Group and the LSD Group as a whole.”
Lai Sun expects to incur a loss of HK$154.6 million ($19.7 million) on the deal, which comes after values of grade A office buildings in Hong Kong plunged 34 percent since 2019, according to JLL, with consultancy Savills forecasting a further 10 percent decline this year.
Paying Down Debt
The asset is set to change hands at HK$41,379 per square foot, with the agreed value under the agreement representing a 12.6 percent discount from the asset’s independently appraised value of HK$20.3 billion as of February.
Lai Sun chairman Peter Lam Kin-ngok
Developed by a 90:10 joint venture between AIA and Lai Sun, the grade A office tower was completed in March 2005 and is located just steps from the Central MTR station at 1 Connaught Road Central at the junction of Murray Road, and can also be accessed via Chater Road.
The asset has a gross floor area of 428,962 square feet (39,852 square metres), with 26 levels of office space. The Lai Sun vehicle which owns the company’s stake in the building recorded an after-tax net profit of HK$288.4 million in 2023, representing a 16.7 percent decline from the previous year.
AIA Central is currently around 80 percent occupied, with monthly rents averaging HK$100 per square foot to HK$110 per square foot, according to market sources. That compares to around 50 percent occupancy and monthly asking rents of around HK$100 per square foot at The Henderson, the newly built office project built by Hong Kong-based Henderson Land Development located a four minute walk from AIA Central on Murray Road.
Values of Hong Kong office assets have been hit by both falling demand and oversupply, with citywide office rents having fallen 33 percent since their 2019 peak and vacancy now averaging a 20-year high of 15.9 percent, according to JLL.
The transaction is subject to approval by shareholders of both Lai Sun Development and its parent company Lai Sun Garment (International), with the developer intending to apply the net proceeds towards repayment of bank loans and general working capital. Lai Sun Development reported total debt of HK$26.6 billion as of January, of which HK$22.0 billion were bank loans.
Bolstering Cashflow
The divestment by Lai Sun comes as the developer booked HK$1.0 billion in fair value losses on its portfolio of office and retail investment properties in Hong Kong, mainland China and London in the six months ended January. Since then, the company has adopted a non-core asset disposal plan to reduce leverage and enhance liquidity.
“Although each of the LSG Group and the LSD Group is expected to record a loss on the Disposal…these losses are non-cash items and the Disposal will improve the cashflow position of the LSG Group and the LSD Group,” Lai Sun Development said in the announcement. “Each of the LSG Board and the LSD Board therefore concludes that it would be prudent for the Vendor to conduct the Disposal, and that the terms and conditions of the Sale and Purchase Agreement are fair and reasonable and in the interests of their respective companies and shareholders as a whole.”
Last month, Lai Sun offloaded the 20th floor and three parking spaces at the Wyler Centre Phase II industrial building located in the Kwai Chung area of the New Territories to Wai Tung International Limited for HK$80 million, with the company describing the disposal as “enabling the Group to reallocate more financial resources on capital structure enhancement.”
In February, Lai Sun sold its half stake in the The Greenwich Village retail podium of the Alto Residences residential development in the Tseung Kwan O area to China Resources Longdation, with the unit of mainland conglomerate China Resources Group having acquired full ownership of that asset for a reported HK$535 million.
Savills predicts that developers will complete another 8 million square feet of office space between 2024 and 2027, exacerbating the current 10.3 million square feet of vacancy in the city.
Note: This story has been updated to show that the transaction valued the property as HK$41,379 per square foot. An earlier version indicated a value of HK$33,141 per square foot and implied a discount of 30 percent from appraised values. Those statements were incorrect and Mingtiandi regrets the errors.
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