A real estate investment trust managed by Singapore’s top developer will acquire a shopping mall in Chengdu from BlackRock for RMB 1.5 billion ($226 million), at a time when China’s retail property sector is struggling in the face of oversupply and a booming e-commerce sector. CapitaLand Retail China Trust (CRCT) has agreed to purchase the six-storey Galleria mall in the city’s Xinnan Tiandi retail area, CRCT’s manager announced on Friday, marking the trust’s first shopping mall in Chengdu and its eleventh in China.
While many China malls are struggling, the acquisition gives CRCT a top performing retail property in a second tier city that the trust’s parent group knows well from its own development projects in Chengdu, which is the capital of China’s Sichuan province.
The sale by BlackRock comes as the company prepares for the expiration in mid-2017 of its BlackRock Asia Property Fund III, which holds the Galleria, and comes just over two months after the same fund sold Asia Square Tower I in Singapore to the Qatar Investment Authority for S$3.4 billion ($2.45 billion).
BlackRock Disposes of Fully-Leased Chengdu Mall
BlackRock’s Chengdu disposal comes just over two years after the US private equity real estate investment firm bought developer Kardan Land’s 50 percent stake in the 53,619 square metre retail property in a May 2014 deal said to value the mall at RMB 1.25 billion. Beijing-based and Dutch-invested Kardan opened the Galleria in 2010 before selling an initial 50 percent stake to MGPA Asia Fund III in 2011. BlackRock acquired that stake when it bought Australian private equity real estate firm MGPA in May 2013.
While Chengdu has been home to China retail mis-steps such as the 2.9 million square metre mall New Century Global Center, CRCT is encouraged by the mall’s performance to date. “The subject mall is one of the most popular malls in Chengdu,” noted CRCT CEO Tony Tan in a company statement. The Galleria is reported to be 100 percent occupied, with tenants including H&M, Nike, Swarovski, and a Golden Harvest Cinema.
Tan was also hopeful about the trust’s ability to improve revenue streams from the Galleria, pointing out that, “Notably, leases accounting for about two-thirds of the mall’s total rent are up for renewal by 2018, presenting us with an excellent opportunity to uplift the rental income through tenant mix adjustments.”
The Galleria purchase, expected to be completed by year’s end, will bring the value of CRCT’s portfolio to RMB 12.547 billion, an increase of about 14 percent. The mall is calculated to have a current net property income (NPI) yield of approximately 5.4 percent.
Finding the Right Buyer in a Tough Market
CRCT’s acquisition comes amidst cooling consumption on the mainland and investor skepticism about the prospects for shopping malls in China. Retail sales rose 10.2 percent in July, according to the National Bureau of Statistics, down from 10.6 percent growth in June, with e-commerce transactions, which grew by 28 percent in the first six months of 2016, tallying most of the sector’s expansion this year.
While many malls are suffering, the Galleria appears to have benefitted from its immediate catchment area of some one million people, including the residents of a number of upscale apartment complexes, as well as a significant retail cluster in the area.
Despite the encouraging vital signs for the Galleria, BlackRock was said to face challenges in disposing of the asset, due to widespread pessimism on China retail, and was fortunate to find in CapitaLand Group a buyer which has a proven fondness for both Chengdu in particular, and the mainland in general.
Although the Galleria will be CRCT’s first asset in Chengdu, as a developer CapitaLand has five malls in the city, including Raffles City Chengdu and CapitaMall Tianfu. Nationwide, CapitaLand had a portfolio of 63 malls in China, accounting for 72 percent of the total gross floor area and 52 percent of the total property value held by the real estate firm.