A mainland property investment group which once spent $449 million to buy control of the Seaworld amusement park group from Blackstone, saw one of its prized assets sold on Taobao this past week, as China continues to sweep up the damage caused by failed attempts at global expansion by some of its largest property developers.
The Zhonghong Tower, an unfinished commercial building in Beijing’s Chaoyang district was sold in a court ordered auction on 7 April, with an affiliate of bad asset bank China Orient Asset Management, which is among the major creditors to the project, picking up the 40-storey building for RMB 3.32 billion ($469 million), according to an official online listing.
The sale of the Skidmore, Owings and Merrill-designed project at the eastern edge of Beijing’s CBD paves the way for completion of a building which first broke ground in 2015, but has seen its progress falter after the developer’s parent firm, Zhonghong Holding, defaulted on a RMB 2.5 billion loan arranged by China Orient in December 2017.
Buying Beijing Buildings Online
Beijing Zhisheng Yunsha Property Management Company (北京植晟雲廈物業管理有限公司), a fund managed by China Orient Asset Management affiliate Beijing Dongfu Jiaji, was one of only two bidders which paid the RMB 200 million deposit necessary to join the online auction, and digitally walked away with the asset in one of Beijing’s prime commercial districts after paying 46 percent above the auction reserve.
The auction on a Taobao-managed distressed asset website was witnessed by some 76,775 followers, with the final sale price coming within RMB 89 million of the property’s valuation of RMB 3.23 billion after a total of 15 bids were placed by the two parties.
Once completed, the strata-title commercial development will provide some 65,616 square metres (706,288 square feet) of gross floor area, which makes the transaction price equivalent to just over RMB 50,612 per square metre. The building is predominantly designed for office use, with some 755 square metres set aside for retail amenities.
The terms of the sale also require the buyer to take responsibility for completing construction and fit-out of 53 pre-sold units in the building, which total some 13,000 square metres.
Investment Dreams Meet Debt Reality
Zhonghong Group had begun sales of units in the 180-metre-tall tower in late 2016, but Zhonghong Holding signed a guarantee in December of that year, providing the prime commercial project as collateral for the China Orient Asset Management-backed RMB 2.5 billion loan.
By the end of the next year, the Beijing property development group had slid from a 2016 profit of RMB 157 million to RMB 2.51 billion in losses for 2017, the same year that Zhonghong Zhuoye, an overseas investment group controlled by Zhonghong Holding boss Wang Yonghong, had completed its $449 million acquisition of a controlling stake in Seaworld from Blackstone.
In July of 2018 Zhonghong Holding defaulted on RMB 1.1 billion in credit obligations to bring the then-Shenzhen-listed firm’s past-due obligations to RMB 2.27 billion.
By November of that year, Zhonghong Holding was delisted by the Shenzhen stock exchange, and in May 2019 its Zhonghong Zhuoye affiliate surrendered its shares in SeaWorld to a securities agent after defaulting on credit obligations.
China Orient Collects on Collateral
By securing the Zhonghong Tower at auction, China Orient Asset Management, which is one of the mainland’s four major managers of distressed assets, gains control of the collateral provided for its loan more than two years ago.
When it was facing delisting in October of 2018, Zhonghong Holding had attempted to sell off the project for RMB 2.5 billion through a similar bad asset sale on Taobao, only to have that effort fail.
Beijing Dongfu Jiaji, which is indirectly 20 percent owned by China Orient, had sued Zhonghong Holding in 2018, in an effort to recoup the RMB 2.5 billion loan, plus another RMB 255 million in interest and penalties.
The creditor had succeeded in the court judgement, which gave Beijing Dongfu Jiaji priority rights of compensation for proceeds from the sale of the Zhonghong Tower.
Although the mainland property market has been mired in the COVID-19 crisis since January, assets in Beijing’s CBD remain rare targets.
In October of last year, a joint venture between Allianz Real Estate and funds managed by Alpha Investment Partners paid the equivalent of RMB 77,351 per square metre to purchase an 85 percent stake in the Ronsin Technology Center commercial complex in Chaoyang district.
Three months earlier, China Vanke had paid RMB 1.3 billion, or around RMB 44,348 per square metre, to buy control of the Beijing HNA Plaza office building in the same district from the trouble parent company of Hainan Airlines.