A buy-and-hold strategy may be changing over to a buy-and-sell business model for one of the mainland’s best known property developers, after SOHO China chairman Pan Shiyi revealed this week that the company would sell three more of its Shanghai properties.
The announcement by the high profile commercial developer came as rising valuations helped the company announce a more than 300 percent increase in its net profit during the first half of 2016 and happened just a few weeks after the company sold a Pudong commercial project for RMB 3.2 billion ($485 million).
Three Shanghai Projects Made Available
The properties to be put up for sale include Hongkou SOHO, north of Shanghai’s Bund area; as well as SOHO Tianshan Plaza and Lingkong SOHO (also known as Sky SOHO) in the city’s Changning district, just west of downtown, according to an account in the South China Morning Post.
Pan characterised all three projects as non-core and told reporters that the planned sales were part of a strategy to sell off peripheral projects and concentrate on prime revenue generating assets. “SOHO will continue to hold and operate its core assets in Beijing and Shanghai,” the SCMP cited Pan as saying, with the property tycoon insisting that SOHO is sticking to its “build-to-hold” business model.
The company founded by Pan and his wife/CEO Zhang Xin has been working to transform itself in recent years from a wealth management platform for Chinese nouveau riches eager to rent out a piece of Beijing commercial space into a more sustainable commercial landlord.
After years of not quite figuring out office leasing, SOHO appears to be making headway this year as rental income reached RMB 700 million for the period from January through June – a jump of 60 percent from the same period last year.
Selling While Values are High
However, selling off properties is not likely to help the company to build its base of rental revenue, and creates confusion regarding Pan and Zhang’s business approach. While the three properties put on the block this week all qualify as decentralised, or non-core projects, a case can be made that the SOHO power couple are selling what they can sell, while they can sell it.
SOHO Century Plaza, the Pudong project that SOHO sold to Guohua Life Insurance last month is located in one of China’s hottest leasing markets, and was averaging vacancy levels in the single digits.
The three projects put on the market this week are not as attractive as SOHO Century Plaza, with Hongkou SOHO said to be just 73 percent occupied and SOHO Tianshan Plaza is still under construction. However, while the company’s portfolio includes more properties in Beijing than in Shanghai, SOHO has opted to push projects from the highly valued Shanghai market up for sale, while none of its Beijing developments have been publicly offered to investors.
Figuring Out What SOHO is About
With domestic insurers and other institutions awash in a wave of newly issued credit, SOHO should be able to secure handsome returns even for non-core assets. Whatever returns the developer derives from these sales will be offset at least in part, however, by new levels of confusion as to SOHO’s mission.
In a research note, investment bank DBS Vickers noted that “…further asset disposal will hurt (SOHO China’s) growth potential and confuse the market regarding its long-term strategy.” And for a company that has been telling investors for years that leasing revenue is the promised land, selling off potential income earning assets may start to generate questions about whether investors may eventually be left wandering around in the desert.