Evergrande Slides After Hong Kong Tower Purchase at Twice Record

  • Company bought tower from Chinese Estates for $1.6 billion
  • Previous record was $697 Million in 2014 paid by Citigroup

Evergrande Real Estate Group Ltd. shares plunged after the Chinese developer paid a record $1.6 billion for a Hong Kong office building, a price analysts at JPMorgan Chase & Co. slammed as too high.

The shares of China’s third-largest developer slumped as much as 8.9 percent, the most since Aug. 24, and were trading 5.5 percent lower at HK$6.17 as of 10:50 a.m. in Hong Kong. The benchmark Hang Seng Index was down 2.1 percent.

Evergrande agreed to buy the Mass Mutual Tower in Hong Kong for HK$12.5 billion from Chinese Estates Holdings Ltd. and will pay the amount over a six-year period, the firm said in a Nov. 12 statement to the Hong Kong Stock Exchange. The 26-story building is fully occupied, according to the statement.

Evergrande’s purchase “at an expensive price is another example of immature capital management,” Hong Kong-based JPMorgan analysts led by Ryan Li said in a note. “The low yield doesn’t justify the price,” which they said was too high given the building’s age, limited upside on rental and less desirable location.

The JPMorgan analysts calculated a 1.7 percent “current spot yield.” The bank has a HK$3 price target on Evergrande’s shares and said it’s maintaining its underweight rating on the stock.

Bustling District

The building in the bustling Wan Chai district changed hands for more than 27 times the sum Chinese Estates paid for it over a decade ago. It bought part of the building for HK$160 million in 1987 and the rest for HK$300 million in 1991, company spokeswoman Eunice Yeung said.

"If you apply a 20 percent premium for naming and signage rights on the building, it’s still overpriced by about 70 percent," Karl Chan, one of the authors of the JPMorgan report, said by phone Friday, in reference to Evergrande’s purchase. The price per square foot was 92 percent higher than the average for similar properties in the area, he said.

It was Chinese Estates’ third property sale to Evergrande this year. In July, it sold a residential, commercial and hotel complex in the western Chinese city of Chengdu for HK$6.5 billion. The company sold another property in nearby Chongqing for HK$1.75 billion, Yeung said.

International Profile

The Hong Kong purchase underscores Guangzhou-based Evergrande’s efforts to boost its international profile. The Chinese developer could rename the building and use the huge rooftop advertising space overlooking Victoria Harbour that is currently rented by Samsung Electronics Co., JPMorgan’s Chan said.

“It shows Evergrande’s resolution to connect more with investors in Hong Kong, especially foreign funds,” said David Hong, Hong Kong-based director of China Real Estate Information Corp.

Chinese Estates is controlled by billionaire Joseph Lau, who paid $48 million for a blue diamond at Sotheby’s Geneva auction on Wednesday night, the most ever paid for a piece of jewelry at auction.

Hours after the Evergrande deal was announced, China Life Insurance Co. said in a press statement it was buying an office tower and retail space from Wheelock & Co. for HK$5.85 billion, making it the second-most expensive building purchase in Hong Kong.

The previous most-expensive transaction for an office tower in the city was the HK$5.4 billion paid by Citigroup Inc. to a unit of Wheelock in 2014.

Chinese Estates shares surged 4.6 percent to HK$19.64. The stock earlier climbed 17 percent, the most since December 2008.

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