Advertisement

SKIP ADVERTISEMENT

UBS Facing Real Estate Headache in Hong Kong

HONG KONG — The Swiss investment bank UBS faces a tenfold rent increase here in the world’s most expensive city for office space, as the main lease on its Hong Kong offices nears its end.

The bank has enjoyed a sweetheart, 10-year lease on space in Two International Finance Center, which dominates the skyline along Victoria Harbor, in a deal struck when the city was staggering from one of its worst economic crises.

UBS has limited options, people involved in the real estate market said, and is set for some tough negotiations with its landlord, MTR, which runs Hong Kong’s subway and owns the main space UBS occupies.

UBS, unlike its rivals Morgan Stanley, Credit Suisse and Deutsche Bank, which all struck fresh Hong Kong leases in a new building in recent years, faces pressure to sort out its space needs in Asia’s financial capital.

Although office rents are slipping in Central, the heart of Hong Kong’s financial district, — real estate professionals say UBS will have to swallow the higher rent to stay where it is, in the building known as Two IFC.

One broker suggested the bank could see its rent go up to 30 million Hong Kong dollars a month, or $3.9 million, from 3 million dollars, or $390,000, now. Over a year, that monthly increase could cost UBS an extra 324 million dollars, or $42 million.

Occupancy costs account for only around 8 percent of an investment bank’s expenses, and $42 million may not seem like much to an institution valued at $54 billion. But UBS is pursuing a cost-cutting program globally, so the prospect of a big rent increase in such a large banking operation comes at a bad time.

UBS is “going to be pretty much hostage,” a Hong Kong real estate specialist at a rival investment bank said. “They’re not going to have a ton of options. Nine out of 10 chances they’re going to stay there.”

The Swiss bank and MTR declined to comment. None of the six commercial real estate brokers interviewed for this article wanted to be identified, because they work with investment banks in Hong Kong.

UBS, which employs 2,300 people in Hong Kong, leases other, smaller space in the city, though most of its operations are in Two IFC. The landmark skyscraper, the tallest building on Hong Kong Island, was completed in 2003, the year severe acute respiratory syndrome, or SARS, and recession ravaged the city. That led to a bottom in the real estate market, which had not recovered from a bubble that burst in 1997.

Faced with renting two million square feet, or 186,000 square meters, in the 88-floor building at such a time, its developers struck deals that now look shockingly low.

The building was jointly developed by MTR and a consortium of Sun Hung Kai Properties, Henderson Land Development and Hong Kong & China Gas, with the Hong Kong Monetary Authority buying the top floors.

As an anchor tenant, UBS signed with MTR in November 2003 to rent 146,070 square feet across six floors at 4.7 million dollars a month, fixed for 10 years — a long lease for Hong Kong. That works out at 32 dollars a square foot.

“They got a phenomenal rent,” a real estate investment banker said. “They went in there when Two IFC looked like a big white elephant.”

There were sweeteners, too. A copy of the lease obtained by Reuters shows that UBS was granted 41 rent-free months, meaning it only pays rent two-thirds of the time. That cuts the effective rate to 3 million dollars a month, or 21 dollars a square foot. And, real estate brokers say, the company received large subsidies from MTR to furnish the space, inducements not on the lease, reducing the effective rent to 15 dollars a square foot.

Jones Lang LaSalle, a real estate services company that now represents UBS in Hong Kong, and Savills, another real estate company, declined to comment on the lease specifics, citing confidentiality agreements with the bank.

“It was one of the better anchor tenant deals at the time,” said Chris Marriott, the chief executive for Southeast Asia at Savills. Marriott brokered the original lease.

UBS has since expanded at Two IFC and rents around 200,000 square feet from MTR on eight floors. The lease on its core six floors, which allowed it to expand into a seventh at the same rent, expires on June 30, 2014. The bank has an option to renew for five years, at the open-market rent.

Large tenants tend to work on rent renewals several years in advance.

The asking rent in Two IFC is 180 dollars a square foot, according to brokers. As a flagship tenant, UBS could command a discount of around 15 percent. But that leaves it facing a rent of around 150 dollars a square foot.

UBS has played hardball before.

After Blackstone bought half of the 32-acre, or 13-hectare, Broadgate development in London in 2009, UBS, the largest tenant, threatened to leave. It opted to stay when Blackstone and the co-owner, British Land, agreed to knock down two buildings and develop a customized 700,000-square-foot London headquarters for the bank.

A new building would not be ready by the time UBS’ lease ends in Hong Kong, however. Landlords are not offering cash incentives for furnishings or rent-free periods, and Savills estimated that Central District had a vacancy rate of 3.2 percent in January.

According to the real estate company Colliers, only the redevelopment of the Ritz Carlton Hotel, mostly taken up by China Construction Bank, and the redevelopment of The Forum by Hongkong Land will come on the market in Central through 2014.

The International Commerce Center, now home to the main Hong Kong offices of Deutsche Bank, Morgan Stanley and Credit Suisse, is close to full. “There’s no block of 140,000 square feet available,” said a broker who has worked with UBS on its leases.

UBS also rents space in Central in the buildings Li Po Chun Chambers, and One and Two Exchange Square. Another broker who works on bank leases in Central said he expected UBS to give up that space when those leases expired and move its back-office operations outside Central, and to renew in Two IFC.

“If I was the IFC landlord, I’d sit until 2014 and wait,” the broker said. “Rents will probably have come back by then. And there’s a decent possibility UBS has few options to maneuver.”

A version of this article appears in print on   in The International Herald Tribune. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT