In its biggest-ever property deal, Swire Properties is selling the Festival Walk mall and commercial complex in Hong Kong to Mapletree Investment, a Singapore property developer, for HK$18.8 billion ($2.4 billion).
The deal comes amid efforts by Swire Properties’ parent, Swire Pacific, to raise cash for expansion in China. The company announced plans in 2009 to spin off the property division by listing it and selling a stake to minority investors, and started roadshows for the initial public offering in April last year. However, it decided to scrap the IPO in May after equity markets became more volatile.
So far, Swire has just one operational project in China — the Sanlitun Village in Beijing, which comprises retail space and a hotel. It also has two mixed-use developments in Guangzhou and Beijing that are due to be completed in phases starting later this year. A commercial complex, retail space and luxury hotel in Shanghai is slated for 2015.
At the time of the IPO, research analysts predicted that China would make up one-third of Swire Properties’ completed portfolio by 2014, from around 7% today.
Festival Walk is a mid- to up-market retail and office building in Kowloon Tong. It was built in 1998 and comprises around 580,000 square feet of retail area and 220,000 square feet of office space. In 2006, Swire bought the 50% stake it didn’t already own in Festival Walk from Citic Pacific for HK$6.18 billion, placing a valuation of around HK$12.4 billion on Festival Walk at the time.
The history leading up to the sale has obviously led to speculation about whether Swire was forced to sell Festival Walk because it was unable to IPO. A source close to the situation agreed that Swire would have had no need for funds had the IPO proceeded on plan. However, this was no fire-sale, he said, highlighting that Swire has received a premium to book value for the Festival Walk property. Rather, it is an opportunistic move by a property manager that wants to build its overall portfolio of assets.
The IPO was being managed by Goldman Sachs, HSBC and Morgan Stanley. And to Goldman’s credit, it is the only one of the three banks that also worked with Swire on the sale of Festival Walk. Mapletree did not have an adviser.
Swire initially invited investors to bid for a 50% stake in Festival Walk. Sovereign wealth funds and private equity funds were seen as likely buyers although strategic investors like Mapletree were also invited to bid. As the process unfolded, Mapletree expressed an interest in having management control of Festival Walk, at which stage the two parties started to talk about a 100% sell-down. Mapletree was awarded exclusivity at the end of June, prompting a flurry of media attention about the deal.
Mapletree is a 100% subsidiary of Temasek. Festival Walk is Mapletree’s first commercial property acquisition in Hong Kong and the buyer intends it to be a seed asset for a portfolio of Hong Kong commercial properties.
“What is especially attractive about [Festival Walk] is that the rental income has increased consistently year-on-year since inception, reflecting the quality of the mall,” said Hiew Yoon Khong, Mapletree group chief executive officer, in a written statement.
Hiew also said that the deal reinforced Mapletree’s strategy to grow in key Asian markets. The deal increases Mapletree’s assets under management by around 20% and increases its overseas assets to 41% of its total portfolio.
As well as property, Swire Pacific is also involved in aviation (it is the biggest shareholder in Hong Kong’s flagship airline, Cathay Pacific, with a 40% stake), beverages, industrials, marine services and trading. Swire Pacific is listed on the Hong Kong Stock Exchange. It is controlled by a UK-based private company, John Swire & Sons, which owned around 41% of its capital and around 58% of its voting rights as of December last year.
Both Fitch and Moody’s said on Friday that the sale would not adversely affect Swire Pacific's ratings. The HK$18.8 billion that Swire will receive from this transaction allows the company to sufficiently meet its HK$14.3 billion in debt obligations maturing this year, said Fitch. The sale will “not have a material impact on Swire's recurring cashflow, as Festival Walk only accounts for 8% of Swire's Hong Kong total lettable gross floor area as at end 2010”, it added. The transaction will improve funds from operations to net debt and better position Swire Pacific in its rating category, said Moody’s.
