Heavy Lifting

Pure Fantasy in Hong Kong

Private equity is interested in Hong Kong's gym to the elite, but fitness studios are a tricky business.
Photographer: Thomas Barwick/Getty Images
At Closing, April 20st
40.87 USD

Owners of The Pure Group are throwing in the towel.

Buyout firm Leonard Green & Partners and businessman Bruce Rockowitz are looking to sell their controlling stakes in Hong Kong's elite chain of gyms, and Chinese private equity firms might be interested, Bloomberg News reported Tuesday, citing people familiar with the matter.

It's surprising that Pure has decided to pursue a block sale now, as opposed to going down the IPO route. Fancy gyms trade a bit like tech companies. New York-listed Planet Fitness Inc. is valued at 29 times forward earnings while YogaWorks Inc., which debuted in August, is on a 30 times multiple.

Power Clean

Some fitness companies are valued more like tech firms

Source: Bloomberg

Putting aside the fact the Hang Seng Index is at a 10-year high, one could argue now is the perfect time for Pure to go public. Businesses that are poised to expand their market share are generally well received by investors, and that's the case here.

About 12 months ago, J.V. Fitness Pte, trading as California Fitness, shuttered its 12 outlets across the city, while Hong Kong's first high-end mixed martial arts club, Epic MMA, closed its doors in August. As a result, Pure has been expanding aggressively. Last month, it opened a 10,000 square-foot facility with four yoga studios in upmarket Pacific Place and it plans to have a second yoga center in Causeway Bay in December.

Perhaps it's the thought of subjecting its financials to public scrutiny.

As with any gym chain, rent is a big overhead, and Hong Kong has some of the highest real estate costs in the world. In the city's central business district, where Pure has eight fitness and yoga centers, office rent was $269 per square foot annually in the second quarter, 75 percent higher than midtown Manhattan and almost double that of London's West End, CBRE Research data show.

Clean and Jerk

Hong Kong is home to the world's most expensive office property, beating Beijing and New York

Source: CBRE Research

Note: Ranking by prime office rents per annum as of second quarter 2017. Tokyo data are for Marunouchi/Otemachi area.

Going by CBRE's data, Pure's new yoga studio in Pacific Place would be costing $2.69 million per year in rent alone. As a long-time Pure Yoga member, I pay just over $2,000 a year and can use any outlet in Hong Kong. At that rate, Pure would need about 1,350 new recruits to cover the landlord bill. It's not surprising that California Fitness, which attracted a less affluent clientele, lost HK$117 million ($15 million) in under three years. 

Hong Kong's crazy property market makes the financial hub a difficult place for fitness studios. Having gone through two years of teacher training with Pure Yoga, I decided to preserve my prana and stay in journalism. Entry-level Pure Yoga teachers are offered as little as HK$350 per class, working out to a monthly income of about HK$28,000. According to Centaline data from August, the average monthly rent for a 430-square-foot apartment on Hong Kong Island was about HK$18,275.

Maybe it shouldn't come as any surprise that private equity firms across the water are interested in Pure. After all, mainland developers are buying up swathes of land in Hong Kong and paying top dollar. If they've got the financial muscle, Pure could well be another asset that slips into Chinese hands.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.