Shui On Land Puts Shanghai Office Tower on the Market for RMB 7.5B

Shui On Land has reportedly put Corporate Avenue One, a prime commercial asset next to the Hong Kong-listed real estate developer’s landmark Xintiandi project in Shanghai, on the market for approximately RMB 7.47 billion ($1.2 billion).

The potential sale of the 83,000 square metre grade A project comes as Shanghai-based Shui On continues to overhaul its balance sheet in the midst of China’s year long real estate downturn. The real estate firm run by Hong Kong billionaire Vincent Lo has also seen its stock price slide in the face of delays and cost overruns in some of the company’s urban renewal projects.

The company is reportedly valuing Corporate Avenue One at more than RMB 90,000 per square metre, according to industry insiders who are familiar with the proposed transaction. The potential sale is the latest in a string of asset sales by Shui On, which has said that it plans to sell as much as half of its assets as it seeks to improve its balance sheet.

If Shui On succeeds in finding a buyer at its asking price, the asset sale would be the biggest ticket real estate sale in China since Li Ka-shing’s Hutchison Whampoa and Cheung Kong Holdings sold the Oriental Financial Centre in Pudong for $1.155 billion in 2013. Li is estimated to have received less than RMB 70,000 per square metre for that property in Shanghai’s Lujiazui financial district.

Shui On Selling Off the Crown Jewels

Shui On is being pressured into the Corporate Avenue One sale as its revenues disappoint and financing options disappear in the face of China’s prolonged real estate slide. According to sources familiar with the discussions, both private equity fund and institutional investors have indicated interest in acquiring the downtown Shanghai property asset.

In a message to shareholders last month Lo vowed to sell off any of its assets which were generating low investment returns, according to a report in the South China Morning Post. The scion of one of Hong Kong’s leading property families characterised 52 percent of the company’s estimated RMB 110 billion in assets as generating low returns.

Shui On did not immediately respond to a request for comment on the reported Corporate Avenue One sale.

Sources familiar with the market, as well as with Shui On’s portfolio of properties have indicated that, while the developer may be seeking to unload its nonperforming assets, investor interest in any such non-core assets has been limited so far. Given the current downturn funds, institutions and other investors have shown a renewed focus on properties in China’s first tier cities, as many fear that second-tier cities are overbuilt.

Corporate Avenue One is rated as a prime office project by brokerage Cushman & Wakefield. Michael Stacy, an executive director with the Tenant Advisory Group at the US-based real estate consultancy said, “Office rental rates at Corporate Avenue One currently average around RMB 12 per square metre per day, and there are no vacancies. The asset has historically been fully leased, making it one of the top performing office properties in Shanghai’s Puxi market.”

The art deco inspired complex is home to high profile multinationals such as PricewaterhouseCoopers, whose name emblazons one of the two buildings in Corporate Avenue One. The complex was completed in 2004 soon after Shui On changed the face of Shanghai’s downtown with its Xintiandi project.

The Corporate Avenue One includes 7,000 square metres of retail space, in addition to 76,000 square metres of offices. Shui On has reportedly engaged Standard Chartered Bank to represent it in discussions with potential buyers.

Slower Sales Bring Down Developer’s Stock Price

Lo has said that Shui On is seeking to cut its debt and free up cash to drive future expansion, as investors have punished the company’s stock over the last three years.

In June 2014 Shui On’s gearing ratio, which measures the company’s debt load against its equity value, stood as high as 64 percent. Lo now says that the company aims to reduce its gearing to 50 percent within three years. Driven by concerns over slow sales and high debt, since December 2012, Shui On’s stock price has declined from HK$4.06 percent per share to HK$1.66 per share, losing 60 percent of its value.

Shui On’s contracted sales for the first two months of 2015 fell by 60 percent in value compared to the same period last year, as the developer sold 23 percent fewer square metres of space, according to a statement to the Hong Kong stock exchange. The decline in sales came despite price cuts of as much as 30 percent on some of Shui On’s residential projects.

Shui On Reducing Debt Level by Selling Assets

In the absence of sales of its development projects, the company has turned to asset disposals and equity transactions over the last few years.

In August last year Shui On sold two Shanghai hotels 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.

The hotel sale was preceded in December 2013 by the sale of projects in the second-tier cities of Chongqing and Hangzhou bringing in more than RMB 2.4 billion ($393 million) for the developer. In Shanghai Shui On sold its 5 Corporate Avenue tower, which is part of the second phase of the Corporate Avenue project, to China Life Insurance for RMB 3.32 billion ($545 million) that same month.

The asset sales came after the developer failed to build support for an IPO of its China Xintiandi subsidiary in 2013.

In November that year, Shui On raised as much as $750 million by selling off approximately 21 percent of China Xintiandi to Canadian real estate investment group Brookfield.

While raising more debt financing was a preferred route for Shui On in the past, the developer has said that it has no plans to head to international bond markets this year. Lenders have become less willing to buy Chinese developer debt in recent months as the slowdown raises fears of market risk, and the recent struggles of developer Kaisa Group Holdings raise the spectre of default.

Shui On built One Corporate Avenue as part of its Taipingqiao urban renewal project which also includes completed projects such as the Lakeville and Lakeville Regency apartment complexes, retail developments Casa Lakeville and Xintiandi Style, Shui On Plaza, the Langham Xintiandi Hotel and Corporate Avenue Two.