China’s real estate downturn continued to put pressure on Shui On Land this week as the troubled developer sold two hotels worth a total of RMB 2.7 billion ($439 million) after posting worse than expected financial results. Luckily, for Shui On Chairman Vincent Lo, he found a ready buyer for the two properties in a company controlled by his older brother and other family members.
The sale of the Langham Hotel next to Xintiandi and the The Hub Hotel in Hongqiao to Hong Kong-listed developer Great Eagle Holdings, a property developer controlled by Vincent Lo’s brother, Ka Shui Lo. The fraternal transaction is the latest attempt by the builder of Shanghai’s iconic Xintiandi project to shore up its balance sheet by selling off assets or equity. Vincent Lo, indicated that more sales of assets or equity by Shui On would be coming within weeks.
In a separate transaction, Shui On bought out its partner in a joint venture project in the city of Foshan in Guangdong province, in what appears to be an ongoing effort by the developer and its related companies to restructure assets.
Selling Hotels to Your Older Brother
According to a statement on August 27th to the Hong Kong stock exchange, Shui On Land is selling its 100 percent interest in the 403-room Hub Hotel to Great Eagle for RMB 965 million ($156.9 million). The report declared the value of the 357-room Langham Xintiandi Hotel at 1.739 billion ($283 million) however the final sales price is subject to the hotel’s upcoming performance and other financial considerations. Sources have estimated the sale will net Shui On $99.1 million.
Langham Hotels International, the management company for the Xintiandi hotel, is a subsidiary of Great Eagle Holdings. The Hub Hotel is part of Shui On’s 380,000 square metre The Hub project, which has struggled to build occupier interest as the Hongqiao transportation hub where it is located has developed more slowly than originally envisioned.
The statement from Shui On said that the sale to Great Eagle, which was founded by the Lo brothers’ father, Lo Ying-shek, was done at arms length at ” prevailing market value of comparable land transactions in Shanghai. In addition to chairman Ka Shui Lo, Vincent Lo himself and oldest brother Antony Lo all sit on the board of Great Eagle.
Gloomy Financial Results for Shui On
The asset sale was announced one day after Shui On revealed disappointing financial results for the first half of 2014. In an August 26th announcement to the stock exchange, the company said that its profits for the period from January to June were down by 24 percent compared to the same period last year. Profits attributable to shareholders amounted to only RMB 797 million after distributions to the owners of perpetual bonds issued by the company and its China Xintiandi subsidiary.
In addition to the slump in profits, Shui On’s revenue outlook has weakened as it reported a slowdown in contracted sales of 56 percent compared to the first half of 2013. Total contracts signed in the period were said to be RMB 2.81 million, for a GFA of 131,400 square metres – a drop in terms of area of 45 percent compared to last year.
One of the reason Shui On has continued to struggle is unexpectedly costly – and slow – relocation of current residents from the sites of some of the projects in its pipeline. In its report, Shui On said it had invested a total of RMB 14.2 billion to relocate residents occupying the future sites of its Shanghai Taipingqiao and Shanghai Rui Hong Xin Cheng projects and that 283,000 square metres worth of space had been cleared in the last few months.
More Sales to Come for Shui On
After announcing the asset sales, Shui On’s Lo said that, “More strategic sales of [non-core] assets will be finalised in coming weeks,” according to an account in the South China Morning Post.
A possible harbinger of future transactions came in an announcement on Tuesday when Shui On revealed that it was buying out the 49 percent stake held by partner Mitsui in a project in Foshan. According to the statement to the Hong Kong exchange, Shui On will pay the Japanese conglomerate RMB 373 million ($60.7 million) for its stake in the Nan Ling Nan Tian Di project.
In the statement, Shui On indicated that “Mitsui is adjusting its investment strategy in the PRC property market.” However, market observers speculate that the Hong Kong developer may also be preparing a future transfer or sale of the asset in southern China.
Regardless of any upcoming sales, Shui On is already one of the biggest sellers of real estate assets in the last year, having disposed of both buildings and shares as investors have grown skeptical of the company’s heavy gearing.
After failing to build support for an IPO of its China Xintiandi subsidiary last year, Shui On raised as much as $750 million by selling off approximately 21 percent of the subsidiary to Brookfield in November.
In December, the Shanghai-based developer continued to raise cash by selling projects in Chongqing, Hangzhou, and Shanghai. Those asset sales also helped to pave the way for a restructuring of a troubled property fund founded to invest in Shui On’s properties, a deal which was just completed early this month.
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