Why private equity firms have been snapping up Hong Kong’s local malls

Lam Ka-sing

Hong Kong’s neighbourhood shopping centres have come into focus recently for their solid rental yields and reliance on local consumers, in contrast to glitzier malls that cater to the more fickle tourist spending.

Property broker JLL estimated that market yields for neighbourhood malls ranged between 3 and 4.5 per cent, well above the city’s high street shops at 2.5 per cent and grade A offices at 2.7 per cent.

“Neighbourhood malls in Hong Kong are an attractive retail asset worth considering for long-term investment due to stability, increased reliance on domestic consumers and relatively higher yields compared to other real ­estate classes.” said Denis Ma, head of research at JLL.

He said the trend would continue as neighbourhood shopping centres typically provided a yield higher than other real estate asset classes.

Investors and funds have channelled HK$63 billion (US$8.07 billion) into ­acquiring neighbourhood malls since 2009, accounting for 63 per cent of total investment, according to JLL.

An aerial view of residential and commercial buildings near Prince Edward, in Mong Kok district. Photo: Martin Chan

Ma said domestic spending was much more resilient than tourist spending thanks to Hong Kong’s consistently low unemployment rate and stable growth in disposable income.

“For example, back in 2009 following the global financial crisis, retail sales in supermarkets grew by 3.4 per cent for the year, a strong performance compared with discretionary categories such as clothing and footwear, which declined by 0.8 per cent,” he said.

JLL said that Sha Tin, Sham Shui Po, Tuen Mun and Tseung Kwan O ranked as the four districts with the highest investment potential for neighbourhood shopping centres.

In December last year Link Reit sold 12 retail podiums to a consortium led by private equity fund Gaw Capital Partners for HK$12 billion. Investment fund Blackstone and investment bank Goldman Sachs were also partners in the deal.

“We find this sector to be defensive,” said a Gaw Capital spokeswoman.

Among the various neighbourhood malls in Hong Kong, business owners say they expect the outlook to remain stable, as their core clientele are local consumers.

“What could affect our business?” said a chef surnamed Fong, who works at the Kam Hoi Lau restaurant in Sha Tin.

The diner, specialising in seafood, chicken pots and roasted meat, can handle up to around 50 customers at time. Fong says the customers spend around HK$50 Hong Kong dollars for lunch, and up to HK$150 for dinner.The business brings in less than HK$10,000 in gross income a day, employing about 10 staff, including cooks, cleaners and waiters.

The restaurant is located in the Chun Shek Commercial Complex, one of the retail podiums bought by the Gaw Capital-led consortium from the Link Reit last year. The owner of the Kam Hoi Lau restaurant, Fu Ho, said he is worried that the business will be squeezed by rising rents as the new owner focuses on driving up investment returns.

In March the landlord raised the monthly rental to HK$120,000, representing a 20 per cent rise from the prior level.

“But what can we do as the ordinary people?” said Fu, who is in his 60s.

Fu Ho, the owner of the Kam Hoi Lau restaurant, said the landlord in March increased the monthly rent on the 1,500 sq ft space he leases in the Chun Shek Commercial Complex in Sha Tin. The property is one of 12 retail podiums sold to a consortium led by private equity firm Gaw Capital Partners in December. Photo: Lam Ka-sing

Gaw Capital Partners said they remain interested in Hong Kong’s neighbourhood malls.

“As a private equity real estate firm, Gaw Capital is actively looking for profitable returns for our investors. We will evaluate deals individually and do the acquisition if it fits our investment strategy well,” said the spokeswoman. “The portfolio of our investments is diversified, ranging from commercial, residential, retail, hotels, co-working space, logistic platform, etc.”

Previously, in October, a consortium led by Phoenix Property Investors bought three shopping centres in Tseung Kwan O from Wheelock Properties for HK$3.38 billion, while local developer Winland Group bought retail plaza Nob Hill Square in Lai Chi Kok from Pamfleet Group for HK$900 million in September.

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