Q&A: Liquidity, scarcity boosting HK property market

Rykadan's William Chan discusses the state of the Hong Kong market and explains why his company is turning from constructing buildings to private equity investing.

After riding on the casino construction boom in Macau, Hong Kong-based Rykadan Capital is transforming its capital-intensive business model as a redeveloper and builder into a private equity shop that focuses on property investments.

In doing so it joins several of Hong Kong's most renowned developers, including Li Ka-shing's Cheung KongNew World Development, and Henderson Land, as each founded asset-management or direct-investment subsidiaries many years ago. 

Sitting in the company’s harbourside office in Kwun Tong, William Chan, chairman and chief executive of Rykadan Capital, a small player in the local property market, discusses the opportunities available in Hong Kong’s property market and his conviction in the continuing rise in property prices.

After raising its inaugural private equity fund last year, Rykadan aims to grow its asset size to $1 billion over a five-year period.

What are the key trends in the Hong Kong property market?

A Turning old commercial and industrial buildings into new office buildings is the biggest trend in the market. Both large developers such as New World Development and our company are active in that area.

As the Grade-A office rent in Central continues to rise, more companies such as JP Morgan and Citi have gradually moved away from central to Kowloon East. The average rent in Central is well above HK$100 per square foot per month. In some cases, the rent in IFC (an 88-floor skyscraper along the Victoria Harbour in Central) is well above $160 per square foot per month. In Kowloon East district such as Kwun Tong and Kowloon Bay, the average is roughly about $30, which is attractive for international financial firms to move their back-office employees, while maintaining their client-facing staff in Central.

In short, the land supply in Hong Kong, especially the commercial property market, is limited. Besides the demand-supply dynamic, the value of property projects will continue to rise because of the wealth of liquidity in the market. Hong Kong’s property prices reflect a mix of local and international liquidity.

(In 2010, the Hong Kong government rolled out a policy making it easier and cheaper for industrial buildings at least 15 years old to be converted for non-industrial use. Since then, many of these factories have been torn down and converted into shopping malls or office buildings.)

With a background in construction, what’s your edge in the world of investing?

Before starting our own fund last year, we made co-investments with different institutional investors, converting old industrial buildings into residential projects during our first five-year period between 2012 and 2017. The strategy proved to be quite successful, in part thanks to a boom in the local property market. With an annualised return of 30% over the five-year period, we began our own venture in private equity last year. Our industry experience from planning to construction is our core strength, in my opinion.

In some sense we are a hybrid of an investor and homebuilder.

What’s your assessment of co-working space in Hong Kong? Your competitor Gaw Capital invested in Naked Hub, which was recently acquired by WeWork.

A I think it is a developing concept and gathers lots of public spotlight. The co-working industry allows people to use technology to enhance our quality of life and efficiency. To me, it is a marketing gimmick because the fundamentals remain unchanged.

Q Can you explain Rykadan Capital’s history and your investment track record?

A Rykadan Capital was originally listed in Hong Kong in 2009 as a construction company. We soon found out the prospects of the construction business in Hong Kong would be adversely impacted by [an] economic downturn or once the casino projects in Macau were completed. In addition, we ran into a bottleneck that prevented us from growing further.  

We first started to enter the world of investing in 2012. Like a property developer with land reserves on their balance sheets, we mainly invest in redevelopment projects in Hong Kong, allowing us to ride on the upward cycle of the property market.

In return, we were able to achieve an internal rate of return of over 30% for the past five-year period between 2012 and 2017. In equity multiple terms, the return is about 2x. As a small startup in property investing, we also team up with other institutional investors to increase our purchasing power. In total, we invested over $1 billion of assets in the five-year period.

In my previous role as a deputy chairman at Macau Success, I oversaw the corporate finance and construction development of various hotel and casino projects in Macau including Ponte 16 Resort, the only French-style five-star hotel in the city.

(The internal rate of return is a key industry yardstick of a private equity firm. Investors, commonly known as limited partners, use IRR to decide which fund to invest in. Equity multiple is another metric of return. 2x means that an investor will get $2 for every $1 invested into a project.)

William Chan of Rykadan Capital

Q What’s your plan for the next five years?

A We raised $100 million from our inaugural fund in December last year and we’re in the process [of completing] our second fund this year. The fundraising size will be around $200 million ... [and it] will be investing mainly in commercial projects. [Our] target [is] to raise money from professional investors including family offices and global asset owners who are looking to increase their exposure to the Hong Kong market.

We pride ourselves in sourcing and executing property projects in Hong Kong [where] we can quickly convert an old building into a residential project that features the so-called mini-flats (these generally refer to an apartment with less than 200 square feet.).

For the next five years (2018 to 2023), we aim to raise at least $1 billion of assets under management. Currently we have five investment professionals and I think our headcount will go up accordingly.

Q What’s your fee structure?

A We charge a 1.5% management fee annually. We also charge a carried interest of 20%, which is in line with the industry standard.

(Carried interest in this case is the cut of profits that private equity firms share with their investors once the deals are successfully sold either through a public listing or trade sale.)

Q How do you differentiate your business model from larger competitors such as Gaw Capital and Phoenix Capital?

A First of all, the two private equity firms you mentioned are much larger than us and they have a longer track record. As a public company, we publish our results regularly to our shareholders. In theory, we have a higher level of transparency than other private equity firms.

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