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COMMENTARY

HK Skycity mall deal fuels economic hub dreams

Hong Kong

HONG Kong real estate investor New World Development will pump in US$2.5 billion to build a sprawling retail centre near the city's remote airport.

The pricey project goes beyond wooing flyers. It's a bold bet that troubled infrastructure initiatives to link mainland China, Hong Kong and Macau will pay off.

New World, a US$15 billion developer, has been awarded the right to develop in Skycity by Hong Kong's state-owned Airport Authority.

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New World will construct a retail and entertainment complex in phases by 2027, then lease the property for another four decades.

Financial prospects seem modest. Based on rents at a nearby shopping centre, Nomura analysts calculate an initial yield on cost of 4.7 per cent. In one sense, that would be decent, considering some prime Hong Kong commercial spots generate less than 2 per cent.

At the same time, Morgan Stanley reckons if New World can charge stores a healthy HK$100 (S$17) a square foot and HK$40 a square foot for offices, the internal rate of return might be in the rough range of 5 to 9 per cent. Single-digit returns are hardly the stuff of investment fantasies.

The development involves something bigger, though. It sits in the middle of a variety of projects under the so-called Greater Bay Area that aim to bring new visitors from nearby cities.

That includes a 55km bridge linking Hong Kong to Macau and the mainland city of Zhuhai. There's also a tunnel connecting the airport area to northern Hong Kong, then linking traffic on to Shenzhen, which is due to be completed in 2020.

Cost overruns and delays have added to the controversy among Hong Kong residents. Business owners have a different perspective. Although estimates vary, the Pearl River Delta region is home to about 60 million people. That means linkages could deliver a serious increase in inbound traffic.

The new roads would lead right to the doors of the newly approved 350,000 square-metre shopping complex. It could become a day-trip destination similar to outlet malls in North America and Japan.

If the bridges and tunnels pan out as planned, New World may have been wise to aim for the Skycity. REUTERS