Hong Kong-based Union Medical Healthcare has found a unique way of meeting its rent obligation amid an economy ravaged by the coronavirus pandemic.
In a first, the company, which provides medical and health care services through 56 clinics and service centres in Hong Kong, Macau and mainland China, has allotted about 8 million shares, or 0.8 per cent of its enlarged share capital, to Champion Reit, its landlord at Langham Place in Hong Kong's Mong Kok district. The share allotment is meant to offset the HK$33.9 million (US$4.37 million) it will owe Champion in rent for five months ending on July 31 this year.
"While this agile and novel rental settlement method provides short-term cash flow relief for the tenant, it offers upside potential to the trust's revenue when the market recovers," Champion Reit, which also owns Three Garden Road in Central, said. Union Medical is its biggest tenant at Langham Place, occupying eight floors with an area of about 140,000 sq ft.
Union Medical's unique solution came not long after a forecast by property agency Savills of about a 20 per cent decline in overall grade A rents in Hong Kong this year. But it is not expected to become a trend. "I doubt the leasing team of a landlord has the expertise to evaluate each listed company," said Ricky Lau, deputy managing director and head of office leasing at Savills.
Landlords that are also developers "might not have the flexibility to" accept such terms because of a more complicated decision-making process at such companies, said Patrick Mak, executive director, general manager and head of Kowloon office services at Knight Frank. Mak said such companies might, however, offer other concessions such as discounts on management fees, or they might waive government taxes. "Developers have less flexibility compared with small to mid-sized landlords [when deciding on such matters]," he added.
Reits have been established for only one purpose " to invest in property and to distribute at least 90 per cent of their net rent income to unit holders, said activist investor David Webb, who is opposed to reits investing in the stock market. "If they start hoarding cash and investing in stocks, or taking shares instead of rent, then this exposes unit holders to a risk that they did not intend to take " in this case, the risk of owning shares in a health care provider," he said.
"The Securities and Futures Commission amended the code for Reits to allow this in 2014, but I'm opposed to it," Webb added.
The rents of some grade A offices have fallen to the grade B level of about HK$40 per square foot. A 2,637 sq ft unit in the Bank of America Tower in Admiralty, for instance, was recently leased for HK$111,000 a month, or just HK$42 per square foot, the lowest level for the building in 10 years. A 6,135 sq ft unit at Admiralty Centre was recently leased for just HK$245,400, or HK$40 per square foot, the lowest level for the building in four years.
The grade A office market had a negative net take up of 466,700 sq ft in the first quarter, its worst showing since the second quarter of 2002, according to CBRE.
Elsewhere, a 3,010 sq ft grade B unit in The Sun's Group Centre in Wan Chai was recently leased for HK$60,000 a month, or just about HK$20 per square foot, the lowest level for the building in 10 years.
"The Covid-19 pandemic continues to depress office rents, with rents in Central and Admiralty dropping 18.6 per cent and 22.2 per cent on year, respectively, extending the decline to 11 consecutive months," said Martin Wong, associate director of research and consultancy in Greater China at Knight Frank. "In the coming months, we expect landlords to be more flexible in negotiating new leases, renewals and lease restructures amid the weakening global economy."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
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