Carlyle Sells Shanghai Office Building at Nearly Half-Off 2015 Purchase Price

The Carlyle Group has sold a Shanghai office building for just over half of the price it paid to acquire the asset in 2015, as vacancy in the city’s office market continues to hover near record high levels amid weak leasing demand.

The US private equity giant has offloaded The Crest in Shanghai’s Changning district to an unnamed Zhejiang-based corporate for over RMB 826 million ($116 million), according to market sources who spoke to Mingtiandi. The transaction price represents a roughly 43 percent decline in renminbi terms and 49 percent depreciation on a US dollar basis from the RMB 1.46 billion (then $230 million) price reportedly paid by the fund manager to acquire the 31-storey tower nearly a decade ago.

The disposal comes after office transactions in Shanghai declined 34 percent year-on-year in the 12 months ended 15 September, with the RMB 81 billion in trades representing the lowest annual total in the last six years, according to a report this month by Savills. Citywide grade A office vacancy averaged 21.8 percent as of the end of the third quarter, while grade A rents have plunged by some 20 percent from the fourth quarter of 2019 through 30 September, according to the consultancy.

“Office transaction volumes in Q3 2024 have fallen to their lowest levels in recent years,” Savills said in the report. “A sluggish economy has weakened leasing fundamentals, leading to elevated vacancy rates and continued rent declines. Despite higher yields, investors remain understandably cautious about entering the sector based on risk considerations.”

Overlooking Yan’an Elevated Road

Washington DC-based Carlyle, which is selling the office tower for over RMB 26,000 per square metre, acquired the building (then known as Wan Bao International Plaza) from Shanghai Yuchang Real Estate Development Co Ltd in 2015 at just under RMB 46,000 per square metre. Carlyle had not responded to Mingtiandi inquiries by the time of publication.

The fund manager reportedly acquired the asset with loans equivalent to around 70 percent of purchase price and renovated the property in 2017, with local media reports estimating Carlyle’s total investment in building at around RMB 1.65 billion.

Completed in 2010, the building is situated near the boundary of Jing’an and Changning districts at 500 West Yan’An Road and has a gross floor area of 31,788 square metres (342,163 square feet) across 29 levels of office space situated above a two-storey lobby.

The LEED Platinum-certified office tower is 77 percent occupied at passing rents “well below” market value, according to JLL, which managed the sale. The asset’s land tenure expires in July 2055 with the building forming part of a complex which also includes the 381-key Hilton Shanghai City Center (formerly Hotel Nikko Shanghai) and the Prince Hills condo development.

Carlyle Spin-Out

Carlyle had reportedly acquired The Crest through a $500 million separate fund managed on behalf of the National Pension Service of Korea, with that vehicle having been earmarked for China real estate deals at the time.

That venture is separate from Carlyle China Realty LP, a value-add fund for which Carlyle began raising money in 2016 with a target of $500 million before halting the fundraise in mid-2017, when the vehicle had secured just $120 million in commitments. The fund was later merged with the Carlyle China Rome Logistics vehicle.

In 2019, Carlyle spun out its China real estate investment business amid waning investor appetite for a country-dedicated property fund, according to the firm’s then deputy chief investment officer of real assets Brooke Coburn.

Lost Decade

Shanghai’s bleak market comes as advisory firm Oxford Economics in May warned of a “lost decade” in mainland China’s office sector after consecutive years of falling rents, record vacancy, and deteriorating investor confidence drove values of office assets in the country down as much as 30 percent from peak levels.

“Despite the prevailing global headwinds, China’s office markets have been flooded with new supply, evidenced by higher vacancies relative to other global markets,” Nicholas Wilson, Oxford Economics’ associate director of Asia real estate economics said in a report. “All major cities across China currently have vacancy rates above 20 percent, with nearly half of the major cities exceeding 30 percent. This means China has the highest vacancy rates of all major markets globally.”

Shanghai Lujiazui Development Group, the state-backed builder which developed much of the city’s Lujiazui financial district, said in its annual report released in April that Shanghai’s office market faces a “long-term correction”. The developer controlled by the Pudong district government is seeking buyers for 20 Shanghai office towers in the Lujiazui area and the Qiantan International Business Zone on the east side of the Huangpu River.

In May, a joint venture controlled by New York’s Rockefeller Group agreed to sell a pair of office buildings in Shanghai’s Bund area to insurer ZhongAn Online P&C Insurance, after average grade-A office vacancy in the waterfront district rose to 16.1 percent from 13.2 percent in 2021.

Earlier this year Shanghai’s office slump motivated US investment management giant BlackRock to put up for sale a pair of office buildings in the city’s Putuo district at a 30 percent discount to what it paid to acquire the properties six years ago.