Link REIT Buying Guangzhou Mall for $501M

Asia’s largest real estate investment trust has made its second major bet on mainland China retail this year with the RMB 3.2 billion ($501 million) acquisition of a shopping mall in Guangzhou.

Link REIT announced late Friday that it was purchasing Happy Valley Shopping Mall in Tianhe district from a property management firm linked to fund manager Warburg Pincus, with a statement to the Hong Kong stock exchange noting the lack of competing retail outlets in that section of Guangzhou’s upscale Zhujiang New Town, as well as the current rebound in consumer spending in China.

“The acquisition aligns with Link’s business strategy of portfolio diversification for long-term stable return,” Link REIT CEO George Hongchoy said in a statement. “It is part of our pursuit of a yield accretive strategy through adding quality income-producing properties with capital appreciation potential in Tier 1 cities in China.”

With the Happy Valley mall currently just over 70 percent occupied, Link REIT is counting on the capabilities of its local team, which already manages Link Square Guangzhou in the city’s Liwan district, to help boost returns from the 2012-vintage property.

Adding Value in Zhujiang New Town

Link REIT’s latest addition to its mainland portfolio measures 90,113 square metres (969,972 square feet) by gross floor area and has 50,361 square metres of retail space. The trust is purchasing the asset at 4.3 percent less than a recent valuation of the property by Colliers International, and at the stated consideration is paying the equivalent of RMB 63,635 per square metre of gross leasable area.

“Leveraging our extensive retail asset management expertise and operational synergies in Guangzhou, we hope to lease up and fully unlock the value of the property,” Hongchoy said, noting that the property is the only sizeable mall in Tianhe district and will benefit from its proximity to two metro stations scheduled to open on the city’s metro line 13 within the next two years. Hongchoy also pointed to the potential redevelopment of the adjacent Guangzhou Machang site as holding the promise for further traffic from workers and residents in the area.

At present, the mall’s 198 tenants help to generate a monthly passing income of RMB 10.6 million through sales of mid-market brands such as Uniqlo, H&M, Muji, Mango and Old Navy. Link’s statement shows that food and beverage, entertainment and lifestyle, as well as general retailers account for 74 percent of the mall’s current retail income, with 68 percent of leases set to expire by 2023 — giving some hope of boosting rental reversions.

“Considering that the passing rent of the property is well below the other properly managed malls in the district and a vacant ex-department store is pending for renovation, there will be large rental uplift potential from re-positioning the mall as integrated leisure and shopping destination for affluent modern families through trade mix upgrade and customisation of service offerings,” Link REIT said in its statement.

In an investor presentation, the trust’s manager said it plans to reposition Happy Valley as an integrated leisure destination for affluent modern families through upgrading the tenant mix at the same time that it expands product and service offerings. Part of that repositioning will involve bringing in more young and trendy brands, while introducing entertainment and experiential elements, at the same time that it enhances sports offerings and aims to attract more children.

The eight-storey structure at 36 Machang Road includes another four storeys of retail below ground, with the property rights set to expire in July 2039. Link will fund the investment, which is set to close this month, with its internal resources and facilities with the intention to hedge the majority part of currency exchange volatility.

Link Likes China Retail

For its seventh investment in mainland China, Link opted to add still more retail to a portfolio that includes two shopping centres in Beijing and one each in Shanghai and Shenzhen, in addition to its Guangzhou assets.

In its presentation, the REIT’s manager noted the strength of China’s economic recovery in the first quarter, which included a 31.7 percent year-on-year increase in retail sales.

Link REIT had added its first retail property in Shanghai in February, when it paid $429 million to acquire a half stake in Shanghai Qibao Vanke Plaza from Singapore’s GIC.

In Hong Kong, the REIT specialises in community retail with 60.6 percent of its overall $26.2 billion portfolio still devoted to shopping centre assets in the city.

Mall Rescue

Link’s management has a preference for value-add opportunities, with its top leadership betting that the company can uses its expertise in managing retail and other commercial assets to juice returns.

In the case of Happy Valley, it is taking over an asset that has suffered from tepid leasing, shareholder battles and debt drama, including multiple failed attempts to sell the property to pay off creditors.

The original developer, Guangzhou Baijiaxin Group, had sold off a pair of 30 percent stakes in Happy Valley in 2017 as the mall struggled to turn a profit.

Not long thereafter, however, Guangzhou Baijiaxin fell into a protracted battle with its minority shareholders — one each from Shanghai and Beijing — after debts reportedly ballooned to RMB 3 billion, while annual rental income at the time was just RMB 180 million.

Three 2019 attempts to sell the property via liquidation auctions on a special section of Taobao failed to attract a buyer, even after the price was marked down to RMB 2.3 billion, according to listings at the time.

Seller Linked to Warburg Pincus

The vendor in this latest transaction is PD20 Investment Holding Ltd, a vehicle backed by P&D Holding Ltd, according to Link REIT’s announcement.

Guangzhou Bilu Property Management Co Ltd, a company set up immediately after another failed auction of the property in November 2019, had purchased the property that same month through a court-managed arrangement for RMB 1.8 billion. As part of that transaction, Guangzhou Bilu also assumed responsibility for settling debts associated with the troubled project.

According to China’s Tianyacha business information service, Li Nan, one of the directors of Guangzhou Bilu, is also a director of Beijing Hande Donghui Asset Management Co Ltd, a Warburg Pincus-backed distressed-asset firm specialising in real estate opportunities.

Li Nan’s name has appeared on the list of directors of more than 20 project companies affiliated with Warburg Pincus.

In February last year, local media accounts reported that Guangzhou Bilu Property Management and Beijing Hande Donghui Asset Management were among a number of Warburg Pincus-backed firms distributing relief supplies as China fought the pandemic.