Qatar Investment Authority's recent purchase of a one-fifth stake in Hong Kong department store operator Lifestyle International seems like a strange way for the sovereign fund to plant its flag in the territory.
These are tough times for Hong Kong retailers as mainland spending looks set to decline. Of late, the company's Sogo store in Causeway Bay has also been beseiged by Hong Kong protestors who have camped out on the stretch of road near the store at the heart of the territory's shopping district. Although their numbers have dwindled, the outlook for retail sales remains less than upbeat.
However, according to a source familiar with the matter, the sovereign fund saw value in the company's real estate, particularly its prime Sogo store. "The big thing for them was the real estate angle," said the source. "Lifestyle owns 90% of their real estate," he added.
QIA conducted an appraisal that put the value of the Sogo property roughly on par with Lifestyle's market capitalisation of about $3 billion, the source said.
Hong Kong real estate is expensive, as anyone who rents property in Hong Kong can attest to. But property in Causeway Bay has recently reached mind boggling levels, with a shop in Causeway Bay sold at HK$1.38 million per sq ft earlier this year.
According to a report by a real estate consultant, the ground floor of Causeway Bay Sogo is 31,382 sq ft. Assuming the property is sold at the record rate, Sogo's ground floor alone would be valued at HK$43 billion ($5.5 billion). Sogo has a total floor area of about 338,870 sq ft and QIA's purchase price valued the company at about $3 billion.
Valuations, however, are a matter of opinion and it is questionable if Sogo can achieve those lofty prices. Hong Kong property prices could also take a tumble when rates rise.
Nonetheless, there could be some value. Tiffany Cheng, an analyst at BOC International, values Lifestyle's entire property portfolio, including its mainland properties, at HK$18 per share, which is 22% above the HK$14.75 that QIA paid. She estimates that the company's net asset value, which is the value of its properties minus other liabilities, is HK$17.6 per share.
Until recently, Lifestyle traded at a premium to its net asset value but its stock has now fallen below its net asset value, putting it in a similar boat to a number of Hong Kong property companies. "Many property stocks are trading below NAV, so it’s hard to see what kind of discount or premium is reasonable," Cheng told FinanceAsia.
Whichever way its bet pans out, QIA's buy is unlikely to be its last in the region. According to the source, the sovereign fund is looking to diversify its portfolio, which is concentrated mainly in Europe and the US, into Asia and is looking closely at China and Southeast Asia. Historically, the fund has focused on banks, consumer and retail sectors but could make a push into technology assets, the source added.
QIA’s M&A team is led by Michael Cho, previously co-head of M&A for Asia at Bank of America Merrill Lynch, and his hire last year was presumably a sign of the sovereign fund's ambitions. Cho left the US firm in 2012 as part of a round of job cuts but clearly continues to work with his old firm as the sovereign fund hired the US firm to advise its latest acquisition. Lifestyle's stake sale also attracted interest from a number of financial sponsors.