CapitaLand has formed a 50:50 joint venture with US real estate private equity firm AEW to acquire 70 percent of the Pufa Tower in Shanghai’s Lujiazui financial district from a vehicle controlled by HNA Group for RMB 2.75 billion ($402 million), according to sources familiar with the transaction who spoke with Mingtiandi.
The transaction will give the CapitaLand-AEW JV sole possession of 24 of the 34 above-ground floors in the 2002 vintage building, with the lobby and 20th storey refuge floor to be jointly owned with Shanghai Pudong Development Bank, which is the sole owner of the remaining eight above ground and three subterranean floors in the building, according to a statement by CapitaLand on Monday.
The Pudong purchase comes as HNA has been liquidating assets globally, and after both AEW and CapitaLand have each made major mainland commercial acquisitions in recent months.
Upgrading an Aging Lujiazui Tower
The Pufa Tower is located at 588 South Pudong Avenue, near the intersection with Century Boulevard, within 500 metres of the Shanghai World Financial Centre, in what is the mainland commercial hub’s most expensive neighbourhood for office space.
Through the purchase, CapitaLand and AEW will gain a total gross floor area of 41,773 square meters (449,640 square feet) of office space, putting the value of the acquisition at approximately RMB 65,832 per square metre of gross floor area, before considering the value of 61 car parking spaces which were also part of the acquisition.
“Continual high demand for quality commercial properties in China’s top tier cities, coupled with low supply, have made the renewal of aging commercial assets a compelling investment strategy in these markets,” said Lucas Loh, President (China & Investment Management) of CapitaLand.
Contacted by Mingtiandi, sources at AEW declined to comment on their reported involvement in the transaction.
The Capital Markets team at Cushman & Wakefield is understood to have advised on the transaction, which came after HNA acknowledged one month ago that it was shopping a list of mainland China real estates assets to potential buyers.
Seeding a Value-Add Fund
At present, the research team at Savills in Shanghai estimates the Pufa Tower to be around 66 percent occupied, despite an overall vacancy rate of 8.7 percent in the Lujiazui area. Rents at the 17-year-old building also underperform the market with Savills citing average achievable effective rents of RMB 9-10 per square metre per day at the Pufa Tower, while the Lujiazui area averages achievable effective rents of RMB 11.3 per square metre per day.
The 2002-vintage building has not had a major renovation since its completion and CapitaLand plans to focus on extracting greater value from the property through a comprehensive asset enhancement initiative. “We see significant potential in enhancing its asset value by upgrading specifications, tenant mix and improving operational efficiencies. By tapping on third party equity, we are driving capital efficiency to provide CapitaLand with the financial impetus to further accelerate our growth,” Loh added.
CapitaLand said it will use the 17-year-old property as a seed asset for a value-add fund which the Singaporean property giant is setting up to invest in commercial real estate in key gateway cities in Asia. The acquisition also marks the Singapore-based developer’s first acquisition of an office property in Shanghai’s Lujiazui financial district, according to its statement.
HNA Fire Sale Continues
HNA’s sale of the floors in the Pufa Tower are only the latest step in a well-documented attempt to raise cash after the airline-based conglomerate burdened its balance sheet through a debt-driven acquisition spree on multiple continents.
The Hainan-based group had purchased the floors in the 71,000 square metre tower for RMB 1.48 billion in 2009, and later used the assets as the basis for the Hengtai Haorui-HNA Pufa Tower Asset-backed securities plan, a quasi-REIT which was officially launched on the Shanghai Stock Exchange in January 2016.
The disposal is HNA Group’s second sale of a Pudong real estate asset in less than a year, after HNA Investment sold the rights to develop a 61,869 square metre mixed-use project in Pudong’s Qiantan area to Fusheng Group for RMB 2.9 billion ($456 million) in May 2018.
In December, the distressed mainland conglomerate reportedly sold a luxury duplex house, a residential flat and five parking spaces in Hong Kong for HK$260 million ($33 million), after discounting the price by HK$90 million. Early last month HNA was said to have targetted the sale of properties worth as much as $11 billion by the end of 2019 after one of the group’s subsidiaries defaulted on payment of the RMB 300 million principal on a trust loan due in September last year.
Foreign Buyers Back in the Mainland Market
HNA’s sell-off comes as CapitaLand, AEW and other foreign investors begin to play a larger role in mainland China’s real estate market.
With this latest acquisition, CapitaLand now owns and manages 21 commercial properties in Shanghai that span close to 1.9 million square meter in gross floor area. In November, the Singapore-government-backed formed a 50:50 joint venture with the country’s sovereign wealth fund GIC to acquire the Star Harbour International Center project in Shanghai’s Hongkou district for RMB12.8 billion (about $1.85 billion).
Boston-based investment manager AEW has also been doing some bargain-hunting in China recently.
In December, the company joined with Beijing-based private equity investor Hony Capital to purchase a 21-storey office tower in the capital for a total compensation of RMB 4.5 billion ($654 million), after bagging the Innov Tower, a fully leased office building in Shanghai’s Caohejing High-Tech Park for $226 million in June 2017.
On the same day that CapitaLand announced its Lujiazui acquisition, Hong Kong-based Gaw Capital revealed its latest Shanghai office buy; the RMB 2.8 billion purchase of a set of four office towers in Gubei from China Resources Capital.