25 September 2018

SOHO scales back its landlord ambitions in Shanghai

SOHO China (00410.HK) chairman Pan Shiyi {潘石屹} has confirmed reports the commercial property developer plans to dispose of three projects in Shanghai. Speaking through his microblog earlier this week, Pan called for calmness among investors, saying it’s nothing but another normal trading activity for his company, as he refuted speculation that he had turned bearish on China’s property market.

His explanation is hardly convincing, however. The projects he plans to sell are all in prime locations with tube links. They should have been completed or at least nearly completed as SOHO acquired the sites in early 2011. But up to now the sites remain a wasteland or just in the early stage of construction.

It stands to reason that tight funding could be the real reason behind the divestment. At the end of June, SOHO had about 10 billion yuan (US$1.64 billion) cash on hand after deducting loan repayments due in one year. That is still far from enough for the company to simultaneously undertake nine projects in the city, International Finance News reported. 

It would be wise to part with some of the projects to ease the mounting financial pressure. Still, the move marks a major setback for SOHO as the largest landlord on the Bund.

In August last year, the Beijing-based company announced a shift in its business model from “build to sell” to “build to hold”, noting that it wanted to seize the long-term value of its prime properties.

Such a strategy for expensive commercial properties requires lots of funding. Pan has insisted that SOHO’s free cash flow would be sufficient to prop up the transformation.

But his decision to put up several projects for sale suggests he may have underestimated the financing burden. It could also imply a downward adjustment of his bullish outlook on Shanghai’s rental trend and therefore on the future cash inflow from his projects.

– Contact the writer at [email protected]




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