State-owned mainland developer Overseas Chinese Town (OCT) has agreed to sell the Bulgari Hotel in Shanghai, as the indebted builder offloads an unprofitable project amidst plummeting revenues and a slow recovery in China’s tourism market.
Building materials maker Jiangsu Jinfeng Cement Group won the rights to the luxury hostelry at the minimum price of RMB 2.43 billion ($344 million) in a public tender for the property, which has failed to turn a profit since opening in 2018, according to a stock exchange filing on Tuesday.
Known for its theme park investments including Shenzhen’s Window of the World and the Happy Valley amusement park chain, Hong Kong-listed OCT intends to use the proceeds from the planned disposal to alleviate part of its RMB 13.6 billion ($1.9 billion) debt burden.
“The Board considers that the Proposed Disposal, if materialised, would allow the Group (i) to revitalise its assets and accelerate asset turnover for the overall strategic planning of the Company; (ii) to apply the inflow of cash from the Proposed Disposal on repayment of loans and borrowings, and could lower the Group’s interest-bearing liabilities; and (iii) to realise investment income,” OCT said in a separate filing.
The developer has obtained shareholder and regulatory approval for the proposed disposal and expects the transaction to complete in the first half of 2024, with OCT expecting to book a gain of RMB 60 million ($8.5 million) on the sale.
Consistently Unprofitable
Located in a former industrial area on the northern banks of Suzhou Creek where Shanghai’s Jing’an district meets neighbouring Huangpu, the hotel has 82 rooms spanning the top eight floors of a 48-storey tower with views of the Bund and the Lujiazui skyline. The property is one of two Chinese locations among nine Bulgari-operated hotels worldwide.
Completed in 2016, the hotel has 63 standard rooms and 19 suites, with historic average daily rates (ADR) ranging from RMB 5,900 to RMB 8,100 for the main room types, according to an appraisal of the property by consultancy JLL. Between 2019 and the first half of 2023, the hotel averaged 54 to 57 percent occupancy.
The proposed sale, which was conducted through a public tender that launched in October, also includes ancillary buildings associated with the hospitality asset, three commercial segments, and parking spaces, which together with the hotel total 35,247 square metres (379,398 square feet) of gross floor area.
The hotel and its ancillary spaces take up 26,834 square metres of floor area and occupy levels B2 and B1, 1 through 3, and 40 to 47 of the complex. The three commercial sections occupy parts of the first three levels and total 3,284 square metres, while the 5,129 square metre car park is located on levels B2 and B1 and can accommodate 88 vehicles.
The 36 storeys wedged between the hotel and commercial sections comprise the Bulgari Residences, with that element of the project also having been wracked by losses. OCT had agreed to sell 51 percent of the set of rental apartments to Tencent-backed gaming company Zhejiang Century Huatong Group for RMB 612 million ($89 million) in April, with OCT retaining a 49 percent stake.
The hotel and affiliated assets being sold to Jiangsu Jinfeng Cement Group, which do not include OCT’s 49 percent stake in the Bulgari Residences, have suffered persistent losses, with revenue nearly halving to RMB 140 million in 2022 from RMB 249 million in 2021. In the first half of 2023, the assets booked revenue of RMB 119 million and a net loss of RMB 6.9 million.
The transaction value represents a 43 percent premium to the assets’ combined appraisal value of RMB 1.7 billion ($241 million) as of August, of which the hotel portion accounts for RMB 1.45 billion. The hotel’s valuation is based on a 10-year discounted cash flow model that assumes an average occupancy rate of 55 percent in year 1, with gradual increases to 66 percent in year 10.
The assets’ valuation also factors in the limited duration remaining on the property’s land lease, which is set to expire in March 2051. The land use rights, which commenced from 10 March 2011, stipulate a duration of 40 years for hotel and commercial usage.
OCT noted that continued use of the Bulgari brand by the hotel is subject to negotiation and agreement between Jiangsu Jinfeng Cement Group and the luxury goods maker.
Asset Sales
Shenzhen-based OCT, which primarily engages in development of residential and commercial properties, hotels, and industrial parks, as well as investments in cultural and tourism-related projects, has been unprofitable since 2020, due to China’s property market slump and subdued consumer spending.
Many of the firm’s competitors have also been selling assets to meet their liquidity needs as financing sources dry up and revenue from property sales decline.
Last week, troubled Chinese developer Wanda Group reportedly agreed to sell its Wanda Reign on the Bund hotel to a family office of Indonesian pulp and paper tycoon Sukanto Tanoto for an undisclosed price. That transaction followed Wanda founder Wang Jianlin’s agreement to sell control of the group’s once ambitious film business to China Ruyi.
“The real estate market is expected to recover slowly amid fluctuations, as the confidence in house purchasing and the commencement of construction may still take time to recover,” OCT said in the filing.
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