Henderson Land Gets $7.7 Billion Helping Hand In Drive To Become New 'King Of Central'

Key Takeaways:

• Hong Kong’s Henderson Land has received $7.7 billion in loans from majority shareholder Lee Shau-kee with no collateral requirement or fixed repayment period
• The Hong Kong developer had net liabilities of HK$77.9 billion at the end of June and a net liability ratio of just 24%

By Lau Chi Hang

Mainland Chinese developers have come under the global spotlight lately as many get crushed under huge piles of debt accrued during China’s real estate boom of the last three decades. Their peers in Hong Kong, an adjacent but separate market, are also facing pressures from high interest rates, though most are faring better than their Mainland peers. 

In such an environment, Henderson Land Development Co. Ltd. (0012.HK), one of Hong Kong’s top four developers, is lucky to have a wealthy benefactor in majority shareholder Lee Shau-kee, who has lent the company a generous HK$60 billion ($7.7 billion yuan) since last year with very few strings attached. That money is coming in handy as the company seeks to become the new “King of Central” by paying billions of dollars for land newly reclaimed from the sea in the city’s key Central financial district.

Unlike many of its Mainland peers that have sunk into the red, Henderson Land posted a net profit of nearly HK$6 billion in the first half of this year, up nearly 25% year on year. Its net liabilities stood at close to HK$77.9 billion, with a low net debt ratio of just 24%. Such results looked quite impressive in the current market of depressed property prices and high interest rates. 

Flexible Terms

The company owes its impressive performance almost entirely to the Lee family’s support. Its interim report shows that loans worth up to HK$60 billion on its books came from Lee family-affiliated companies, and that those loans require no collateral or fixed repayment periods. The company did not disclose what interest rate the loans bear. But given Henderson’s reported medium-term financing cost of 3.79% in its interim report, the rate is likely quite low.

The loans are also why Henderson has been able to keep its medium-term net liability ratio at the comfortable 24%. Without those funds the ratio would rise to nearly 43%, which though not dangerously high, is still quite a bit above the stated level. Such low-interest loans can also give a company more flexibility in its capital allocation. 

The lack of specified repayment period also leaves Henderson Land free of any worries about the need for future refinancing, and lack of collateral also lessens pressures on the company. 

Central Ambitions

But is there more to Lee Shau-kee’s generosity than what meets the eye? The interim earnings statement notes the loans will be used to pay off other bank loans used for land acquisitions in 2021. Much of that appears to refer to a site in Hong Kong’s Central area, the city’s main financial district, called Site 3 Central Harbourfront, which Henderson paid a whopping HK$50.8 billion to buy. Henderson isn’t the only developer with its sights on Central, which boasts some of the world’s most expensive properties due to an acute land shortage. 

British company Jardine Matheson (JAR.L) bought and developed huge tracts of land in Central through its Hong Kong Land (HKLD.L) subsidiary when the city was still a British colony. Many of the district’s tallest and most famous buildings still belong to the company, including the one housing the Hong Kong Stock Exchange and the ultra-high-end Mandarin Oriental hotel. 

With Hong Kong Land owning so much prime land, other developers faced difficulty getting into the area, no matter how much money they had, because there was simply nothing left. But local tycoons were determined to make their mark, and in the 1980s several, including Li Ka-shing and Lee Shau-kee, began snapping up Hong Kong Land shares with hopes of one day buying the company completely. 

But their plan was derailed when Hong Kong’s stock market crashed in 1987, following the Black Monday U.S. stock market crash at that time, dealing devastating losses to the tycoons. Hong Kong Land ultimately bought back the shares, and the tycoons promised not to try to take over the company again for the next seven years, marking the end of that saga. 

The fight over Central subsided for a while, but began to heat up again with the start of a new wave of land reclamation in the area. First, Sun Hung Kai (0016.HK) and Henderson Land teamed up to buy a piece of land reclaimed to develop an Airport Express rail station and built the International Financial Center there, at that time Hong Kong’s tallest building.

Reclamation activities created opportunities for other developers in the Central area as well. But Henderson Land has been one of the most passionate about the district. It spent nearly HK$23.3 billion several years ago to buy the commercial site at 2 Murray Road, Admiralty, and successfully snapped up the reclaimed Harbourfront 3 site three years ago for HK$50.8 billion.

Henderson Land now has a total of about 3.5 million square feet of land in the Central and adjacent Admiralty districts. Though still no equal of Hong Kong Land, it has narrowed the gap to just 1 million square feet. 

But its aggressive bidding may have led it to overpay. The closing price of Harbourfront 3 was 37% higher than the second highest bid, and that amount looks especially high with values and rents in Central now falling due to fallout from the pandemic and China’s economic slowdown. Against that backdrop, Lee’s Shau-kee’s largess is perhaps less surprising, especially if Henderson intends to keep buying more land at the relatively low prices in the current depressed market. If it succeeds, it may only be a matter of time before it lands the spot as new “King of Central.”