Office space trader shoulders leasing risks

money-glitz | Stella Zhai 11 Nov 2019

Hong Kong property trader Team Eight has filed to publicly list on the main board last month, marking its third attempt to do so after its applications lapsed in July, 2018, and in January this year.

Jeffrey Liu Wai-lun, the founder, is the son of real estate tycoon Rita Liu Tong Wei-oi. He is a descendant of Liu Po-shan, the founder of local property operator Liu Chong Hing Investment (0194). He is the nephew of Jacinto Tong Man-leung, founder of property investment firm Gale Well Group.

The commercial property hunter mainly acquires properties with value enhancement potential from vendors, adds value to the properties by one or a combination of its value enhancement services, including subdivision, renovation and improvement, and wholesale-retail bridging services, and then earns profit by reselling.

The company mainly focuses on trading office units in core business areas in Hong Kong, such as Central, Admiralty and Wan Chai, and retail shops in shopping malls and community areas.

It has undertaken 22 projects involving a total gross floor area of 182,872 square feet and currently manages 11 projects under its portfolio with a total GFA of 76,003 sq ft.

The total book value of the company's properties was HK$944.9 million as of July 31.

It has most recently added an office under its project in Lippo Centre in Admiralty since August, with consideration of HK$82.8 million.

On many occasions, the properties it acquired had tenancy agreements and it became the new landlord of the relevant properties after the deals were completed. As such, the company also received the rental income generated from these leases, says the company in the prospectus.

Revenue for the four months ended July 31, grew by 2.9 percent over a year ago to HK$251.45 million, while net profit for the period slid by 4.5 percent year-on-year to HK$19.63 million.

The overall real estate and property investment sector is highly fragmented with no key market players, and Team Eight accounted for a market share of 0.05 percent in terms of the amount of purchase for building units in Hong Kong in 2018, according to a commissioned Frost & Sullivan report.

There were about 9,000 companies engaged in real estate business and 1,180 establishments of them engaged in property holding and resale business in Hong Kong in 2018, as well as numerous individual investors who also participated in property investment and subdivision business, according to Census and Statistics Department.

Grade A office rents in the Central area slid by 3.2 percent during the third quarter this year, the biggest quarterly drop in seven years, said property consultant Cushman & Wakefield. The vacancy rate meanwhile grew by 3 percentage points from a year ago to 7.4 percent, the highest since 2014.

Given the large monetary value and small quantity of property units it holds, the company warns that it cannot guarantee a stable income stream per month due to its mode of operation.

Also, it is subject to risks related to the leasing market, including the changes in market rental level, competition for tenants and inability to collect rent from tenants.

The dealer is meanwhile exposed to liquidity risks, including the risk that its properties may not be readily converted to cash, and transaction costs like commission fees and stamp duty would be involved, it warns in the prospectus.

Team Eight plans to spend a part of the proceeds raised to acquire new properties to enlarge its existing property inventory portfolio. Another part will be used for the expansion of its sales and marketing function. Also, the company intends to use a part of the fund for expansion and strengthening of its human resources, while the rest will be used as general working capital.

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