Gaw, Goldman Sachs, PAG Shopping Commercial Building on Shanghai’s Nanjing Road

An investor group including Hong Kong-based private equity firms Gaw Capital and PAG and the merchant banking arm of Goldman Sachs is marketing a grade-A commercial building on Shanghai’s famed West Nanjing Road in the midst of China’s property market slump.

The consortium, which also includes an investment vehicle controlled by the founders of US restaurant chain Panda Express, have engaged Savills and Colliers to manage the sale of Ciros Plaza near Shanghai’s People’s Square, according to announcements by the consultancies.

Mingtiandi has learned from market sources that the asset is being sold through a private tender process, with reports indicating an asking price of around RMB 40,000 per square metre, with other sources indicating a bottom line rate “in the mid-30s.” The state rate would value the property at from RMB 2.6 to 3.0 billion ($372 to $425 million), with reports indicating that, prior to the pandemic, the partners had received offers of over RMB 65,000 per square metre for the asset.

The partners are putting the asset up for sale as commercial property in mainland China’s commercial capital struggles against a backdrop of a sluggish economic recovery and tepid leasing demand, with average office vacancy city-wide climbing to 19.1 percent in the third quarter, according to Savills.

“Given the size, location, and current market conditions, the eventual buyer is likely to be a domestic firm, possibly private/family offices. Current market conditions are challenging, though a stabilisation of economic expectations is expected to result in greater business clarity and increased leasing activity in 2024,” James Macdonald, head of China research at Savills told Mingtiandi.

Desirable Location

Located at 388 West Nanjing Road near the boundary separating Shanghai’s Jing’an and Huangpu districts, Ciros Plaza is situated within walking distance of People’s Square station, which is accessible by lines 1, 2, and 8 of the Shanghai metro.

Constructed in 2001, the property has 84,968 square metres (914,584 square feet) of total floor area spanning 31 storeys of office space situated above an eight storey retail podium. The office portion takes up levels 9 through 39, while the retail section occupies the first seven levels and an additional basement floor. The LEED platinum-certified building also has three levels of underground parking space.

The partners are flogging 70,396 square metres of total floor area, including 47,597 square metres of office and 22,800 square metres of retail space. The underground parking space is excluded from this figure.

The property’s valuation excludes 9,995 square metres of space under separate ownership on a strata title basis, including 4,699 square metres of office and 5,296 square metres of retail space. The limited duration remaining on the property’s land lease, which is set to expire in March 2045, also has an impact on the valuation.

The building counts Abbott, HSBC, NEC, SAP, Sephora, and Air France among its office tenants, while the retail portion includes F&B, lifestyle, and clothing shops as well as entertainment venues, bank branches and a Maserati showroom.

Falling Occupancy

Previously majority-owned by Gaw Capital, the property was sold to the consortium in October 2015 in a transaction that saw Goldman Sachs and PAG join as new investors, with each partner acquiring a 32.8 percent stake in a holding company that owns 98.68 percent of the property, excluding the strata portion. A fund controlled by Panda Express founders Andrew and Peggy Cherng also took a 4.03 stake in the vehicle.

Gaw Capital and affiliated entities retained 30.37 percent ownership of the entity following that 2015 deal, while the remaining 1.32 percent stake is held by an independent third party who is an original minority owner.

The consortium paid RMB 2.86 billion (then $451 million) to purchase the 98.68 percent stake in a deal which valued the property, excluding the strata portion, at RMB 2.90 billion (then $457 million), according to a stock exchange filing by Pioneer Global Group, an investment vehicle controlled by Gaw Capital’s founding family. The transaction was conditional upon the partners refinancing the existing shareholders’ loans with bank loans.

The building’s occupancy has declined since the investors’ purchase, with Pioneer disclosing a 77 percent occupancy rate as of September 2023, compared to 93 percent at the time that the consortium invested.

PAG had not responded to Mingtiandi’s queries by the time of publication, while Gaw Capital declined to comment.

Hunting for Deals

Office leasing in Shanghai has waned since 2022 amidst corporate cost-cutting and economic uncertainty, with the market weakness motivating owners to offload commercial property holdings and incentivising prospective buyers to hunt for bargains.

“As sellers start to price assets more realistically under current market conditions, investors are taking another look at the sector that many have forgone in recent years,” Macdonald said in an October report.

Last week, troubled mainland builder CIFI Holdings bought out the 50 percent interest held by Hong Kong’s Henderson Land in a Shanghai commercial and residential project containing CIFI’s headquarters for RMB 428.2 million ($59.7 million). CIFI was said to be shopping its headquarters in March, with Henderson’s exit likely setting the stage for an eventual disposal.

In April, municipal government-controlled Ningbo Haichuang Group purchased the D1 building at Shanghai Hongqiao World Centre for RMB 510 million ($74 million) from troubled builder Sichuan Languang Development, which used the building as its headquarters.

In January, Singapore’s CapitaLand Investment acquired the Springs, an office project in Shanghai’s Yangpu district, from New York-based Tishman Speyer at a value of RMB 7.6 billion ($1.1 billion).

That deal came just days after insurance giant AIA paid RMB 5 billion ($716 million) for a 90 percent stake in a retail-office complex in Shanghai’s Hongkou district from municipal government-controlled investment firm Shanghai Industrial Holdings.