Date
22 September 2017
SOHO China has flagged a cautious outlook on the commercial real estate market. Photo: Bloomberg
SOHO China has flagged a cautious outlook on the commercial real estate market. Photo: Bloomberg

Commercial property slowdown: Threat or opportunity?

Weighed down by a fatigued economy, China’s commercial property landscape is anything but upbeat. Office towers in Beijing and Shanghai have been witnessing falling rentals, prompting observers to question the market prospects. Meanwhile, excess stock of malls and arcades in second- and lower-tier cities is adding to the jitters.

Against this backdrop, it’s interesting to note that some companies are seeing the current situation as a unique chance to “buy low” and consolidate market share while others, obviously concerned about heightened oversupply risks, have embarked on an exit strategy.

SOHO China Ltd. (00410.HK), the largest prime office real-estate developer in Beijing and Shanghai, and Financial Street Holding Co. Ltd. (000402.CN), a Beijing-based firm involved in sales and leasing of high-end commercial property, are two contrasting cases representing the opposite strategies.

Late last month, SOHO China sold two of its office complexes in Shanghai — SOHO Hailun Plaza {海倫廣場} and SOHO Jing’an Plaza {靜安廣場} — to Financial Street. Both the properties are Grade A office towers-cum-shopping arcades — one located in Shanghai’s bustling Hongqiao district and the other in the city Jing’an area. Hailun Plaza fetched 3.05 billion yuan (US$491 million) while Jing’an was priced 2.18 billion yuan, according to a regulatory filing.

SOHO China CEO Zhang Xin {張欣}, wife of company founder and famed realty commentator Pan Shiyi {潘石屹}, admitted that the 5.23 billion yuan transactions could provide extra liquidity for the firm.

The two properties were built less than three years ago as SOHO China’s flagship developments in Shanghai when the firm announced an aggressive 30 billion yuan investment plan for the city. The asset disposal runs counter to the company’s “build-and-hold” model, indicating that Pan has had a sudden change of outlook on the city’s commercial property market, while also pointing to SOHO China’s thirst for cash.

SOHO China had budgeted 4.1 billion yuan for the two projects. Including the financial costs over the past years, the company does not seem to get much from the deal.

According to some observers, Hong Kong tycoon Li Ka-shing’s move to shed some Shanghai office assets has provided a cue to others such as Pan. Pan told the China Securities Journal that he is considering shifting his focus back to Beijing, the firm’s home base, as 75 percent of SOHO China’s new projects are centered in Shanghai — a very high proportion.

The firm’s core net profit reached a new high last year at 4.4 billion yuan, but the bulk was contributed by sales of existing projects. Overall revenue shrank 9.43 percent from the previous year to 14.62 billion yuan, and contractual sales declined for the third consecutive year.

SOHO China’s cautious stance now is in contrast to Financial Street’s efforts to build its presence in top-tier cities in defiance of the market headwinds.

Financial Street’s commercial property contractual sales surged 59 percent to 14.9 billion yuan last year. Shanghai and Guangzhou are the next strategic spots for the company to cater to its corporate clients who want to expand from Beijing.

Including the high-profile acquisition of SOHO China properties, Financial Street is poised to splurge more than 8 billion yuan in Shanghai and Guangzhou for a takeover spree, Beijing News reported. Unlike SOHO China and other private developers, Financial Street is eager to boost its size and market share even when the market is in a downturn.

It’s apparent that the Beijing municipal government wants Financial Street to chart new territories across the nation on top of its dominance in Beijing’s commercial properties. Other regional cadres also welcome Financial Street on strength of its track record and connections with high value-added clients like governmental agencies and multinationals.

While the latest developments point to a different market outlook and strategy, access to funds would be another key consideration.

Financial Street’s state-ownership means easier access to loans and government subsidies, offering a chance for the firm to adopt a high-leverage model and boosting its ability to withstand greater risks. SOHO China, however, has no such luxury.

– Contact the writer at [email protected]

RC

 

EJ Insight writer

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