While investors such as Li Ka-shing may be fleeing China’s slumping real estate market, Blackstone is reported to be diving in deeper, as the US private equity giant is said to have purchased a Shanghai commercial complex this week for RMB5.3 billion ($854 million).
Blackstone’s latest mainland real estate acquisition is said to be L’Avenue, a 99,740 square metre office and retail project in western Shanghai, which is currently owned by a joint venture between an LVMH-linked private equity firm and a company belonging to Macau casino magnate Stanley Ho.
Although the transaction has yet to be confirmed by either Blackstone or the potential sellers, the story has already leaked out in China’s government-owned media. If substantiated, the deal, which would value L’Avenue at RMB 53,000 ($8,541) per square metre of above ground space, could signal a new season of acquisitions for international private equity firms in China’s real estate markets.
Buying an A Building in an A- Location
L’Avenue was opened in 2013 in Shanghai’s Gubei area in Changning district, a high-end commercial area west of downtown that commands high rental rates for office space.
According to Michael Stacy, head of the Tenant Advisory Group for China with Cushman & Wakefield, the office portion of the 31-storey building has performed well since it began pre-leasing in 2012.
“The building’s 48,000 square metres of office space are now fully occupied, but we would expect asking rentals for full floors to be 11 yuan per square metre per day, with tenants needing to pay at least 10 yuan to get in,” Stacy told Mingtiandi. “L’Avenue has seen rentals nearly double from when it first began leasing three years ago at around six yuan per square metre per day.’
Despite the presence of LVMH’s brands such as Louis Vuitton, Dior, and Fendi in the luxury mall, however, shopper traffic is said to be disappointing. The project’s location away from downtown and without immediate subway access puts it at a disadvantage when competing for tenants and shoppers as more malls open on the Shanghai market.
L Capital Ready to Exit
While none of the parties involved in the reported transaction have made themselves available for comment on the reported deal, the transaction appears to be a case of one private equity investor getting an opportunity to exit, while Blackstone gets a chance to buy an asset with solid revenue streams and some tantalising upside.
L Real Estate, which held 50 percent of the asset, has been said to be interested in disposing of its stake since early this year. The private equity firm is itself a joint venture between French luxury conglomerage LVMH and an investment management firm belonging to the family of LVMH chairman and CEO Bernard Arnault.
L Real Estate, together with Stanley Ho’s Sociedade de Turismo e Diversões de Macau (STDM), started the $500 million development project in 2009, and L Real Estate is likely eager to take advantage of the strong office leasing, and what could be a flat retail leasing market in the future, to time its exit.
“Last year L’Avenue brought in RMB250 million in net income, and the purchase price works out to about RMB50,000 per square metre, so it’s not a bad deal for Blackstone,” one senior private equity executive told Mingtiandi.
Did Share Surge Create an Opportunity for Blackstone?
For Blackstone, the opportunity to gain another asset in the Shanghai market at an affordable rate may have been too good to pass up.
In recent years foreign fund investors have lamented the compression in real estate investment yields, particularly in Shanghai and Beijing, as office rents failed to keep pace with increasing competition for commercial real estate assets among both Chinese and international investors.
Since superinvestor Li Ka-shing sold the Oriental Finance Center (OFC) office tower in Shanghai’s Pudong district to China’s Bank of Communications for RMB1.15 billion in 2013, foreign funds have been faced with competition from domestic Chinese buyers with longer time horizons, and often bigger pocketbooks. Blackstone itself has not acquired a real estate asset in Shanghai or Beijing since it bought the Huamin Imperial commercial building (now renamed as Garden Square) in 2012.
With domestic Chinese investors now turning their attention to the booming share markets in China and Hong Kong, sellers appear to be finding a less ready market for even core real estate assets on the mainland this year. Hong Kong developer Shui On Land put One Corporate Avenue on the market for a reported RMB7.47 billion in March this year, but according to investment brokers in Shanghai, there is not yet an imminent sale for the prime office asset in downtown Shanghai.
West of the city centre, however, Blackstone may have found an asset at an affordable purchase price that still has some upside in the coming years.