The deal involves Champion Reit, Hong Kong’s largest commercial Reit, and one of a sequence of trusts that were launched with great fanfare in Hong Kong in 2006 only to perform disappointingly. Apart from the fact that it owns only one asset, Citibank Plaza in Hong Kong’s Central district, it is also well known for its use of financial engineering.
Champion, like other Hong Kong Reits launched in 2006, used interest rate swap agreements in order to boost yields in its earlier years by deferring interest payments to later in the trust’s life. The logic for this at the time of launch was that commercial assets in Hong Kong were paying historically low rents but that they would unquestionably increase next time leases came up for renewal. This has proved to be correct: rental contracts in Citibank Plaza are going at more than twice the spot price at the time of the IPO. But the approach alarmed many institutional investors, which found it opaque, and this is perhaps the biggest reason why five of the six Reits launched in Hong Kong to date are trading below their IPO prices (the exception being the first of them all, the Link Reit).