Hong Kong’s Link REIT may be a newcomer to the mainland China property market, but it quickly made up for lost time this week by purchasing Shui On Land’s Corporate Avenue phase one for RMB 6.6 billion ($1.063 billion).
The purchase price, which was announced to the Hong Kong stock exchange today, was slightly lower than market reports that surfaced earlier this month, but still makes the acquisition of the downtown Shanghai property the biggest investment in a mainland China real estate asset so far this year.
The acquisition was The Link REIT’s second deal ever on the mainland, after it bought a Beijing mall during March. For Shui On, however, the sale is part of a string of asset disposals as the once headlining developer struggles to bail out its balance sheet.
The Link REIT Pays RMB 79,380 Per Square Metre
The Link REIT, which is Asia’s largest real estate investment trust, is buying the two building complex in Shanghai’s Huangpu district at a price that makes this the biggest commercial real estate transaction in China since the Bank of Communications bought the Oriental Financial Center in Pudong from two companies controlled by Li Ka-shing for $1.15 billion in 2013.
“This is our second investment in Mainland China and a major step forward for income and growth diversification,” said George Hongchoy, CEO of The Link Management Limited, which manages The Link REIT.
With a total of 83,155 square metres of above ground space, Shui On is getting RMB 79,380 per square metre ($1188 per square foot) for the property located just next to Shanghai’s Xintiandi. The retail and entertainment complex constitutes the crown jewel in Shui On founder Vincent Lo’s rapidly shrinking property empire.
The price per square metre is still the highest ever for a major commercial property in mainland China, far more than the RMB 65,000 per square metre that Li’s Hutchison Whampoa and Cheung Kong Holdings received for the Oriental Financial Centre two years ago.
Hongchoy expressed confidence that the REIT had made a good purchase. “It is in close proximity to Shanghai’s retail destination of Huaihai Middle Road. Convenient transport connectivity and a catchment area of affluent business and residential communities, combined with the strong market for premium Grade A office space make this an attractive long-term investment,” the fund manager said.
According to a statement from the REIT, the occupancy rate of the two building complex has remained above 94 percent since 2011. As of 30 June 2015, occupancy of the retail and office components of the property was said to be 100 percent and 98 percent respectively. One of the two buildings is leased by financial consulting firm PwC and bears the company’s name.
Shui On’s Empire Continues to Shrink
Shui On’s sale of the two building office complex is the latest asset disposal by a company that once basked in the success of its Xintiandi project.
When Shui On’s Lo announced early this year that the Hong Kong-listed developer was putting Corporate Avenue phase one and other company properties on the block, he explained that Shui On is “highly geared,” and was only achieving rental yields of between 3 and 4 percent on its commercial properties, while having to pay interest of 7 percent on borrowed funds.
Even before this latest sale, the Shui On Group, which also includes development and building materials group SOCAM, had sold off a number of properties over the last two years in an attempt to reduce its debt load.
In late May Shui On Group subsidiary SOCAM sold the Four Seasons Hotel in Pudong to local Chinese developer BM Holdings for RMB2.3 billion ($371 million). During the same month, SOCAM sold off its stake in a cement joint venture for HK$2.55 billion ($329 million).
Those sales were preceded in August last year by Shui On’s disposal of two Shanghai hotels near Xintiandi for a total of RMB 2.7 billion ($439 million) to Hong Kong-listed developer Great Eagle Holdings, which is controlled by Lo’s older brother and other family members.
Already in 2013, Shui On had sold one of the two buildings in phase two of Corporate Avenue to China Life Insurance for RMB 3.32 billion ($545 million), as part of an earlier series of asset sales.
At the same press conference where he disclosed the company’s attempts to sell Corporate Avenue phase one, Lo said that the company is also trying to sell phase three of the commercial project. Mingtiandi reported earlier this month that a consortium made up of China Vanke, private equity firm PAG Real Estate Partners and Tishman Speyer is said to be close to purchasing the planned project for RMB 3.57 billion.
Should the sale of Corporate Avenue phase three go through, the developer will now have sold off all of its assets surrounding the iconic Xintiandi retail and entertainment complex, except for Corporate Avenue 3, one of the two towers in the development’s second phase.