This will never work (Vol 1, No 30)
We’re talking property today.
News #1 – Yat Lok Roast Goose Store Sells for HK$82.8mn
The first piece of news is about Yat Lok Barbecue Restaurant.
Yat Lok is famous for their roast goose but they closed two months ago. They recently sold their shop for HK$82.8mn. Based on the 2,800sf space, the sale price works out to HK$29,571psf.
Since Yat Lok owned their own space, they didn’t have to pay rent. But market participants have estimated that the transactional yield is around 2.2-2.9%. This implies monthly rent of HK$150,000-200,000.
Back in January, before Yat Lok closed down, the price for one whole Roast Goose was HK$460. In order to cover the rent, they would have to sell 326-434 roast goose a month. Since this would only be about 11-15 goose a day, no problem.
But hold on, rent is not the only costs. Generally speaking, for a F&B establishment, occupancy costs in Hong Kong should be around 10-20% (Cafe de Coral at 11.8%, LH Group at 18.4%). If we take the mid-point, say 15%, whoever winds up renting the previous Yat Lok space would have to earn monthly revenues around HK$1.0-1.3mn. In roast goose terms, this means selling 2,174-2,899 geese each month. At the bottom of the range, this works out to a minimum of 72.4 roast goose a day.
I suppose if you are a Michelin one-star restaurant and had been previously featured in Anthony Bourdain’s No Reservations, selling 72 goose a day is no problem.
But for anyone else, it’s going to be a lot of cholesterol.
News #2 – Greatest Trade from the Greatest Asset Trader in Hong Kong?
Li Ka-Shing is one of the best asset traders in the world.
Last year, he sold The Center in Hong Kong for HK$40bn. When he was asked why, he said that he expects to deploy the returned capital and generate at least double the recurrent income that The Center earned.
He’s off to a good start. Just a little over one month after completing The Center transaction, he has deployed about one-quarter the proceeds and generated about 62% of the income.
The HK$10.5bn that he’s spent in buying 5 Broadgate in London is believed to carry a 5% passing yield.
Consider the following:
- 5 Broadgate is reported to generate HK$500mn rental income a year. This is 62% of the HK$800mn rent that The Center generated.
- The HK$10.5bn spent is only 25% of the HK$40bn that he got from selling The Center.
- 5 Broadgate was completed in 2015. The Center was completed in 1998. He’s switched from a 20-year-old building into a three-year old asset.
- 5 Broadgate is let to UBS until 2035, giving Mr. Li 17 years of certain cash flows. The Center’s leases are generally for three years, and by the way, Goldman’s back office has just moved out this year.
Hmm, what’s that saying about “Actions Speak Louder than Words”?
News #3 – CKA Secures Plans to Convert Service Apartment into Office Complex
According to the HKEJ, back in January 2018, Cheung Kong Asset got approval for building plans to redeveloped Harbourview Horizon in Hunghom into two new office blocks.
Although the building plans is only meant to be for long-term planning purposes and there is no detailed timeframe for the redevelopment, you’ve got to wonder “Why now?”
Harbourview Horizon is officially called an “All-Suites Hotel” but it’s really more of a serviced apartment complex. In 2014, the 1,980 serviced apartments at Harbourview Horizon were 88% let and generated rental income of HK$325mn.
If you think about the current climate where the Hong Kong Government is conducting a Public Consultation entitled “How to tackle land shortage? Land for Hong Kong: Our Home, Our Say”, isn’t it strange that Asia’s best asset trader is making plans to change 1,980
homes serviced apartments to offices in an unproven business district?
And this is happening when everyone is saying that Hong Kong home prices will never go down. Clearly, someone is zigging when everyone else is zagging.
This will work.