New venture eyes collective investment scheme for Hong Kong street shops
Originally published at the South China Morning Post on December 7, 2015.
As Hong Kong property prices continue to fall, one new player in the market is exploring a way to cash in by creating a collective investment scheme for street shops - a venture that a veteran property expert says requires skill to succeed in a traditionally high risk sector.
Bridgeway Group is a new Securities and Futures Commission-licensed asset management firm that specialises in collective investment schemes for street shop properties in Hong Kong. The company raises money to purchase properties before establishing schemes that pay investors quarterly rent, as well as return when the space is resold.
Edwin Lee, the company’s founder, said that the concept behind the scheme is to allow property investors to diversify their portfolio without buying entire shops, within a time frame of their choice. Offering a range of contracts from two to 10 years, the firm targets clients with HK$8 million of current assets - who invest a minimum of HK$1 million per share in one scheme - and charges a management fee in addition to a performance fee if the fund makes money.
“In Hong Kong, the difficulty in buying a shop is the large amount of investment because it’s tens and millions of dollars,” said Lee, who is also a director of Hong Kong’s Cyberport Management Company . “[With Bridgeway] people can invest as little as HK$1 million, and at the same time if they have more they can diversify in different funds. We want to securitise the property shop market.”
The scheme comes at a volatile time in Hong Kong’s property market. Having fallen up to about 30 per cent this year, rents and prices of prime street shops are slated by analysts to decline further by up to 15 and 20 per cent respectively next year, as tourism from mainland China continues to drop amid Beijing’s anti-corruption campaign.
The rental downturn is also expected to span across two years, hitting street shops most severely, according to a report by US commercial real estate company CBRE. Landlords may divide some shops to enable lower rents and smaller requirements for retailers moving forward, the report added.
According to Lee, the downturn represents a good time to purchase properties that will inevitably rise in value as a result of Hong Kong’s limited street shop supply. The venture will focus on acquiring properties in districts with new developments in the future like Kowloon city, where a high-speed railway connecting Hong Kong to Guangzhou is expected to launch in 2018.
“Many of the landlords are willing to reduce prices. Now it’s a good time to buy bargain deals,” Lee said. “If the market is very hot like three or two years ago, I think it would be very difficult.”
The firm is planning to launch four schemes - three in Hong Kong and one in London - and purchase 20 properties with cash, borrowing from the bank at a maximum rate of 40 per cent with leverage depending on the value of each shop. Their goal is to close the first couple of funds within the first quarter of 2016, and make HK$1 billion by the end of next year.
Veteran property analyst Peter Churchouse said that the retail sector is also the riskiest in the market, and to succeed on a large scale requires a very specialised skill set, he added.
“There are lots of people who get a few friends and acquaintances together, inject some capital, set up a company and go out and invest in real estate. That is quite common. But such companies typically have a small number of shareholders,” Churchouse said. “The mechanics of establishing and running larger collective schemes like this in real estate are difficult. How do you give investors liquidity? Is it an open ended vehicle, or closed end? What is the hold period for the assets?”
Most analysts predict that the retail market will be soft overall, but particularly so for street shops in districts that cater to China’s tourism market. Yet big price declines do present medium to long term opportunities for investors, he added.
Prior to establishing Bridgeway, Lee founded Hong Kong Business Intermediary, a brokerage company specialising in small business sales. The firm saw the establishment of 78 new business and over 1,100 sales transactions between 2001 and 2013.