Kwoks’ Charges Place Hong Kong Oligarchs Under Siege

Two International Finance Center (IFC), center right, stands in the central business district of Hong Kong, China, on Monday, July 30, 2012. The IFC, which stands 420 meters (1,378 feet) tall, is operated by Sun Hung Kai Properties Ltd., Hong Kong's biggest property developer.

Photographer: Jerome Favre/Bloomberg

Sky City Church is the perfect spot for billionaire Thomas Kwok to contemplate his two passions: religion and the family property empire.

The church occupies the 75th-floor glass-encased pinnacle of Hong Kong’s third-highest building and offers postcard views of the two taller ones -- all at least partly owned by Kwok’s Sun Hung Kai Properties Ltd.

On a recent Sunday morning, with the sun glinting off the world’s most expensive skyscrapers and the blue waters of Victoria Harbor below, a fast-talking evangelical pastor is exhorting Sky City’s congregation to keep the faith, Bloomberg Markets magazine reports in its September issue.

“Be strong,” the pastor urges. “Be courageous. Flex your muscles!”

Alone on the back row, where he had slipped in unnoticed midservice, the slightly built Kwok, 60, leaps to his feet in unison with the rest of the 100-odd mostly younger worshippers.

Then, as the impassioned congregation bursts into exuberant, electric guitar-backed song, Kwok disappears as unobtrusively as he arrived.

Kwok needs all the strength and spiritual sustenance he can get. After building the company founded by their father into the world’s second-biggest property business, Thomas Kwok and his two brothers, Raymond, 59, and Walter, 61, have seen their wealth and reputations ravaged, first by a family feud and then by their arrest earlier this year in a bribery investigation.

Unspecified Favors

On July 13, along with two other men, Thomas and Raymond were charged with conspiring to provide the Hong Kong government’s former No. 2 official, Rafael Hui, with payments and loans totaling more than 35 million Hong Kong dollars ($4.5 million) for unspecified favors involving Hui’s role as the government’s then-chief secretary.

Hui, 64, was also charged with accepting bribes. The case before Hong Kong’s Eastern Magistrates’ Court was adjourned until Oct. 12. As of Aug. 14, Walter Kwok, who is estranged from his younger brothers, had not been charged.

At its peak in January 2008, the Kwoks’ 43 percent stake in Sun Hung Kai was worth almost $25 billion. By Aug. 14, it had plummeted to $15.3 billion.

The collapse is all the more remarkable given that during the same period, Hong Kong residential real estate prices, as measured by the Centaline Property Agency Ltd. home price index, soared by 57 percent.

‘Peace and Joy’

None of the Kwok brothers would comment for this article, although at a press conference after being charged, Thomas and Raymond denied the offenses.

“As a Christian, my faith gives me hope, peace and joy,” Thomas said. “The Bible’s teachings act like a beacon, guiding me through the darkness.”

The Kwoks’ woes may signal the waning of their power and that of Hong Kong’s other property oligarchs.

Last year, the Kwoks, together with three other billionaire tycoons, sold a remarkable 93 percent of the Hong Kong homes on the market.

“These guys have been a real oligopoly, wielding tremendous power,” says Hugh Young, who helps manage $80 billion of Asian equities, including Hong Kong property companies, at Aberdeen Asset Management Asia Ltd. in Singapore.

Vast Fortunes

Three property barons, all octogenarians, feature among the world’s 40 richest individuals, according to the Bloomberg Billionaires Index: On Aug. 13, Li Ka-shing, 84, owner of Cheung Kong Holdings Ltd. was the 13th richest, with a fortune of $25.7 billion; Henderson Land Development Co.’s Lee Shau Kee, 84, ranked 30th, with $19.3 billion; and Cheng Yu Tung, 86, of New World Development Co. was 39th, with $16.6 billion.

These tycoons emerged from World War II and China’s civil war to ride the Asian boom and amass vast fortunes. As they approach the end of their lives, they face the challenge of protecting their wealth and passing it on to the next generation.

The Kwoks’ feuding hasn’t helped.

“What’s happened at Sun Hung Kai has not just knocked people’s confidence in that company, but the sector,” says Peter Churchouse, managing director of Hong Kong-based Portwood Capital Ltd.

Since the beginning of 2008, when the infighting first became public, the Hang Seng Property Index, which measures the stock price performance of seven of the city’s biggest developers, had fallen 28 percent compared with a 27 percent fall in the benchmark Hang Seng Index as of Aug. 14 even as residential, office and retail property prices have soared.

Opium Traders

All of Hong Kong’s property oligarchs -- Robert Ng’s Sino Land Co. and Robert Kuok’s Kerry Properties Ltd. alone accounted for 20 percent of home sales last year -- risk losing some of the influence they once had over government policy.

Since Britain seized Hong Kong from China in 1841 after going to war on behalf of opium traders, politics and property have been entwined.

Under the regime of former Chief Executive Donald Tsang, whose term expired in June, real estate prices doubled in seven years, leading to scrutiny by Hong Kong legislators of the relationship between public officials and developers.

In March, the Independent Commission Against Corruption arrested Tsang’s former deputy, Hui, as part of the same investigation that targeted the Kwoks.

Then, just before he left office, Tsang himself was forced to apologize for accepting private-jet and yacht trips from property moguls.

Tight Relationship

Now, Tsang’s successor, Leung Chun-ying, a former property surveyor who was installed in office on July 1, has promised to end the tight relationship between the government and the tycoons.

Even before he took office, Leung’s credibility was being challenged by opposition lawmakers after the city’s Buildings Department said it found that illegal building works had been carried out at his home.

Then, 11 days after being sworn in, one of Leung’s top officials, Development Secretary Mak Chai-Kwong, resigned in the wake of media allegations he had abused his government housing allowance in the 1980s.

The reports alleged that Mak and another official had bought apartments in a residential project and then leased them to each other while collecting rent allowances.

Stooge for Beijing

The ICAC said in a statement on its website on July 12 that the head of a government bureau, an assistant director of a government department and two other people had been arrested on charges of violating bribery laws over housing allowances.

The officials weren’t identified, although a Hong Kong TV station reported that Mak was assisting in an ICAC investigation.

Many opposition politicians and activists also believe Leung is a stooge for Beijing.

On the day he took office -- coinciding with the 15th anniversary of Britain’s return of Hong Kong to Chinese rule -- tens of thousands of protestors took to the streets to rail against his appointment, which was sealed in a vote by an election committee of 1,200 mostly pro-Beijing tycoons and other establishment figures, as it had been for his predecessors.

“Our biggest concern about him is he won’t be able to protect Hong Kong’s autonomy from mainland China,” says James To, an opposition Democratic Party lawmaker.

Living in Cages

Leung’s is a populist platform. Hong Kong has the world’s highest property prices, with residential apartments running 85 percent more per square meter than in London, according to broker Savills Plc. A house on Victoria Peak sold this year for a record HK$1.99 billion.

Hong Kong also features the greatest income inequality in Asia, according to government statistics. Median monthly household income has remained unchanged at HK$20,000 since 1997. The earnings of the poorest 10 percent -- equivalent to just $280 a month -- declined almost 20 percent from 2001 to 2011, while those of the wealthiest advanced 12 percent, to the equivalent of $17,740.

Some impoverished residents live in tiny subdivided rooms, sleeping in wire cages that afford a modicum of security and privacy.

In response to public unrest over the wealth gap, Leung has pledged to help low-income earners by making more public land available for cheaper housing.

He’s in a position to control land sales because under Hong Kong law, the government owns it all in perpetuity and leases it out to developers.

‘Vested Interest’

Income from property sales accounts for 10 percent to 15 percent of government revenue, K. C. Chan, secretary for financial services and the Treasury, says.

For the past eight years, the government has restricted land supply to bolster prices and keep land-related revenues pouring into government coffers.

“The government has a vested interest in keeping the prices high,” says Marc Faber, who manages $300 million at Marc Faber Ltd. in Hong Kong and publishes the Gloom Boom & Doom Report. “There’s been a very cozy relationship between the government and the big property developers.”

While Leung has yet to spell out his policies, Nicole Wong, a real estate analyst at Hong Kong-based investment bank CLSA Asia-Pacific Markets, estimates he’ll increase land supply by as much as 40 percent annually. In June, Deutsche Bank AG said property prices could plunge 20 percent within a year.

“It’s the beginning of the end of the tycoons’ dominance of the Hong Kong economy,” says David Webb, a shareholder activist and former Hong Kong stock exchange director whose Webb-Site.com Inc. promotes corporate transparency.

‘Dinner Is Over’

That’s a view even one tycoon shares, though Leung has no track record as an agent of change.

“The developers’ big dinner is over,” says billionaire Ronnie Chan, chairman of Hang Lung Properties Ltd., the fourth-biggest company in the Hang Seng Property Index, who says he hasn’t bought land in Hong Kong for 10 years because of the high prices.

Even with Sun Hung Kai’s diminished market value of HK$277 billion on Aug. 14, it’s surpassed in size only by Indianapolis-based Simon Property Group Inc., the largest U.S. shopping mall owner.

Founded in 1963 by a trio of entrepreneurs, including Henderson Land’s Lee Shau Kee, who remains a nonexecutive director, Sun Hung Kai eventually passed to co-founder Kwok Tak Seng.

Kwok Power

On his death in 1990, his eldest son, Walter, who has a master’s degree in civil engineering from Imperial College London, took over as chairman and managing director. Thomas, who has a master’s degree in business adminstration from the University of London’s London Business School, and Raymond, a Harvard MBA, became his deputies.

Such was the power of the Kwoks that when Walter was abducted in 1996, the family bypassed the police and negotiated directly with the kidnapper-gangster, nicknamed Big Spender, Joe Studwell writes in Asian Godfathers: Money and Power in Hong Kong and Southeast Asia (Profile Books, 2007).

The victim was held in a box for five days until the family paid a $77 million ransom to Cheung Tze-keung, who was arrested in China and executed in 1998. Studwell writes that the kidnapping strained relations between Walter and his two brothers, whom “he perhaps suspected of spending too much time haggling over the price.”

Mentally Unfit

In 2008, Walter took his brothers to court, alleging that Thomas and Raymond were seeking to oust him as chairman of the family company on grounds that he was mentally unfit.

Walter countered that his brothers wanted to remove him because they opposed inquiries he had been making into the way the company awarded construction contracts.

Later that year, the court ruled in favor of Thomas and Raymond, who temporarily installed their aged mother, Kwong Siu-hing, in Walter’s job and, last December, appointed themselves co-chairmen. Walter remains a nonexecutive director.

In March, the ICAC arrested Thomas and Raymond along with Hui, who between two spells in government had worked as a consultant to Sun Hung Kai.

In May, the ICAC arrested Walter. Sun Hung Kai said in two separate statements that the brothers had informed the company that they were arrested by the ICAC under the Prevention of Bribery Ordinance, which carries penalties of up to 10 years in prison. All three brothers are free on bail. Hui declined to comment.

Attracting Headlines

The Kwok case has attracted more headlines than any other investigation by the ICAC since shortly after the British authorities who then governed the colony set up the agency in 1974.

Almost four decades later, the city, one of China’s two special administrative regions, ranks as the 12th-cleanest place in the world to do business -- ahead of Germany, the U.K. and the U.S. -- in Transparency International’s 2011 Corruption Perception Index.

The coziness between government and property developers survived the British handover of Hong Kong to Chinese rule in 1997. Although a British colonial governor was replaced by a Beijing-anointed chief executive, many governing officials remained the same.

The territory kept its own currency, pegged to the U.S. dollar. While Tsang, a former colonial civil servant with a British knighthood to his name, couldn’t dictate Hong Kong monetary policy -- that’s effectively in the hands of the U.S. Federal Reserve -- he could affect property prices by adjusting the supply of land on the market. He let prices continue to rise, according to CLSA’s Wong.

Different Pressures

A year before Tsang took office, Hong Kong suspended regular land auctions and replaced them with a system in which developers had to guarantee to offer a minimum price before a sale went ahead.

This was meant to redress a 69 percent slump in the roller coaster Centaline residential property index from 1997 to 2003 as Hong Kong was buffeted by the Asian financial crisis and the outbreak of Severe Acute Respiratory Syndrome, or SARS, a highly contagious viral respiratory disease.

Tsang’s successor, Leung, faces a different set of pressures, which may help to explain why he says he will put more public land on the market. Hong Kong is about to become more democratic.

In keeping with the spirit of the hand-over terms struck with the British in 1984, China eventually pledged that at the next election, in 2017, all eligible voters among Hong Kong’s 7 million people will have a vote for the first time.

‘Business as Usual’

“The chief executive will have to focus more on the public interest than the tycoons’ interest,” shareholder activist Webb says.

If so, not everyone has gotten the message.

On April 4, not long after their arrest, Thomas and Raymond Kwok convened a press conference in the lobby of their headquarters. Raymond said he couldn’t say much about the ICAC probe, except that he and his older brother hadn’t done anything wrong. Thomas chimed in with a fanfare of reassurance: “Don’t worry; it’s business as usual here at Sun Hung Kai.”

Editors: Stryker McGuire, Rick Levinson

http://www.bloomberg.com/news/articles/2012-08-14/kwoks-charges-place-hong-kong-oligarchs-under-siege