Beijing’s Sino-Ocean Capital recently completed an acquisition of an office building in Shanghai’s Xuhui district, closing on the purchase of the H88 Yuehong Plaza despite delays caused by the pandemic and weakening demand for commercial space in the city.
The mainland investment management platform of developer Sino-Ocean Group managed to complete its RMB 2 billion ($286 million) purchase of the 60,000 square metre (645,835 square foot) property in the Caohejing High Tech Park from China Everbright Limited in early June, according to parties involved in the transaction.
Sino-Ocean Capital completed the transaction despite office vacancy rates in Shanghai hitting a ten-year high of 20 percent in the beginning of this year — a level at which they have stayed through mid-2020, as a growing supply of suburban office space collides with rising caution among corporate office tenants in China.
RMB 90M in Annual Rental Income
At the transaction price Sino-Ocean is paying the equivalent of RMB 33,333.33 per square metre for the 19-storey office building at 88 Hongcao Road in Xuhui district, with a set of 200 parking spaces thrown in at no extra charge.
The commercial asset was originally developed by Hong Kong-based fund manager CLSA, which completed the project in 2015 and later sold it to mainland financial services giant China Everbright for $280 million in a deal which closed in June 2017.
Space in the building is currently available at an asking rental rate of more than RMB 6.5 per square meter per day, generating annual rental income of around RMB 90 million from tenants including, mainland job-search and daily services website 58.com and local home furnishing and decor company Wision Furniture.
Betting on Shanghai’s Business Parks
In Sino-Ocean’s announcement, the company, which has assets under management of more than $11.8 billion according to its LinkedIn profile, explained that its acquisition of H88 Yuehong Plaza could provide attractive returns, despite the current office slump.
“Although this year’s market is affected by multiple variables such as the impact of the pandemic, downward pressure, and changes in the financing environment, asset transaction prices have fluctuated to a certain extent,” said Yue Zhou, Deputy General Manager of Sino-Ocean Capital. “However, judging from a long-term perspective, we believe that high-quality real estate assets have investment properties that cross the cycle.”
In comparison to more developed segments of Shanghai’s commercial real estate market, the company said, business park properties, such as those in Caohejing High Tech Park, still maintain the potential for rapid growth as the city’s technology sector develops.
Noting that Caohejing is already home to more than 3,600 high-tech, R&D, and service organizations, Sino-Ocean said that it sees great potential in investing in the commercial cluster just southwest of Shanghai’s urban core, due to ongoing strong demand from tech enterprises and the location’s higher rental rates compared to other business parks in Shanghai.
Investing in Offices Despite High Vacancy
While Sino-Ocean Capital is understood to have originally began conducting due diligence on the H88 Yuehong Plaza acquisition in July of last year, fluctuations in the market, including the advent of the coronavirus pandemic led to the deal only reaching a final close last month.
Over the period, Sino-Ocean had been in frequent contact with the seller, according to Eric Liu, a partner in Dentons law firm who advised China Everbright on the disposal. Liu sees the COVID-19 as proving to many companies that they still require office quarters for their teams.
“To a certain extent, the pandemic has provided companies a chance to try out remote working and shared coworking spaces.” Eric said. “After this experiment, many enterprises will realize that the remote model is closely tied to the nature of their industry, work content and mode of operation — not all businesses are suitable for remote working.”
Despite the enduring need for offices, Liu, who counts real estate transactions among his specailites, sees the impact of the current crisis on corporate financial performance as potentially translating into downward pressure on rents.
“Judging from research and statistics published in various markets, rents should be reduced to a certain extent in the near future, and office vacancy rates will further increase,” Liu said.
Note: This story has been updated to show that Dentons advised China Everbright on the sale of H88 Yuehong Plaza. An earlier version indicated that the firm had represented the seller. Mingtiandi regrets the error.