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Hong Kong home run

Morgan Stanley's $300 million sale of Vicwood Plaza, a Hong Kong office tower, has generated a healthy return for the US investment bank.

Last month, Morgan Stanley Real Estate sold Vicwood Plaza, a 38-story office and retail tower in Central Hong Kong, to Macquarie Global Property Advisors for approximately HK$2.6 billion ($300 million; €240 million), more than three times what the investment bank had paid for the property three years ago.

Morgan Stanley initially acquired the building in 2003 from a distressed building materials company which had been forced to sell the property by its creditors. The initial purchase price, HK$843 million, made Vicwood Plaza the largest real estate deal in Hong Kong by a foreign institution in the previous two years. Nevertheless, it wasn't only the size of the deal that made the transaction complicated.

“Vicwood was a distressed asset,” says Zain Fancy, executive director and head of Morgan Stanley Real Estate Asia Pacific. “We bought it around the time that SARS was just finishing in Hong Kong.”

Despite the specter of SARS, Fancy notes that Vicwood had a number of positive attributes that attracted Morgan Stanley to the deal. The building had also been underutilized, presenting an opportunity to reposition the property.

“We liked the assets because, at that time, Hong Kong was at a cyclical low,” Fancy says. “It was in a central location, right on top of the MTR. And it was tired—it was an old asset and the flow of traffic wasn't very clear. And the retail shops were pretty distressed.”

Morgan Stanley teamed up with Pamfleet Asset Management, a Hong Kong-based operating partner, to significantly renovate the building, spending approximately $8 million on renovating the floors, upgrading the common area and the elevators and separating the entrances to the office and the retail in order to improve the flow of foot traffic.

The repositioning appears to have paid off. When Morgan Stanley acquired the building in 2003, it was 50 percent occupied. Today, according to Fancy, it has occupancy rates of 95 percent. Over that same time, rents in Hong Kong have gone up three or four times and Morgan Stanley has been able to refinance the building twice.

Macquarie may have its hands full trying to repeat Morgan Stanley's success. But the private equity real estate firm appears willing to try, not just with Vicwood, but with other nearby assets as well. Simon Treacy, a managing director of MGPA, recently told The Standard that Macquarie is looking to make even more investments in Hong Kong.