Chinese developer Sino-Ocean Group Holding has sold its stake in a commercial project in Beijing’s Fengtai district for RMB 5.02 billion ($740 million) to Ping An Life Insurance amid weakening sales and dropping bond prices.
The mainland financial heavyweight has agreed to purchase Sino-Ocean’s 34.5 percent stake, along with the proportionate creditor’s rights, in the Yuan Yang Rui Center (also known as RayZone) project in the Lize commercial district from two affiliates of Sino-Ocean, according to a statement posted to the disclosure section of Ping An’s website on 15 May. The agreement was entered into on 29 April, the statement shows.
By paying RMB 3.42 billion for equity interests and RMB 1.6 billion for creditor’s rights, Ping An now has full ownership of the 147,380 square metre (1.6 million square foot) project. The price, about RMB 34,000 per square metre, represents a 12 percent discount to the property’s valuation as of 31 December 2021 by a third party, according to Ping An’s statement.
Ping An described the terms of the deal as fair and reasonable, given market conditions and the status of the project.
It is “a common practice” to reduce or increase the selling price within 10 percent of the valuation, and another 2 percent discount was agreed on because the supporting infrastructure around the project remains under construction, the scale of the transaction is large and there is uncertainty around the potential for a rapid sale, the company said.
“Sino-Ocean has gained from the sale thanks to the appreciation of the overall Lize commercial district,” said Gordon Liu, deputy managing director of capital markets for China at Cushman & Wakefield.
Still, some see the deal a quick disposal by Sino-Ocean motivated by liquidity concerns.
“With supporting infrastructure around the asset likely to improve in the future such that it would be value-accretive, the seller could have held on to the asset longer and avoided selling it at a fairly large discount to appraised fair value unless it really needed the liquidity in a short period of time,” said Junguang Tan, Director of Asia Core Credit at credit intelligence and analytics firm Reorg.
Records from the Qcc.com business credit inquiry platform show that Ping An’s ownership in the project company, Shenzhen Pingxuan, was increased to 100 percent on 9 May from 65.5 percent, indicating that the transaction has been completed.
Double Green Certified
Billed as China’s first office building to have been certified at Gold levels by both the LEED green building standard and the WELL scale for healthy workplaces, RayZone was completed in May 2021 after Sino-Ocean and Ping An had begun construction on the project in 2017.
The 42-floor building in what is planned as Beijing’s “Second Financial Street” is currently less than 50 percent occupied, according to market analysts. Tenants are mostly state-owned financial institutions and Fortune 500 foreign companies, including China Reinsurance Group and Orient Fund Management, according to a local news report late last year.
Sino-Ocean took over the RayZone project by investing in a 34.5 percent stake in Shenzhen Pingxuan one month after the project company acquired the land parcel used for the project and two neighbouring land parcels in the Lize commercial district for RMB 5.04 billion in total, said news outlet The Paper.
Lize, with relatively low rents and located about five kilometres (3.1 miles) southwest of Beijing’s central business district, has been attracting large companies as they strive to cut costs amid COVID-19, local media said.
Stable But Squeezed
Sino-Ocean has appeared relatively stable amid the Chinese real estate sector’s turmoil, as the company has not yet defaulted on its debts or delayed publication of its financial results.
Despite this relative good health, the developer’s bond prices have slumped several times this year. On 9 June, Sino-Ocean’s seven-year US dollar bond, issued in 2019, fell by 30 percent. The company’s Hong Kong-listed shares are down almost 30 percent since early January.
With over 600 projects in China, Sino-Ocean in April sold off a partial stake in a commercial complex in Beijing’s Jiuxianqiao business district in Chaoyang district to its largest shareholder, China Life Insurance, for around RMB 3 billion.
Profitability has been narrowing for the company. Sino-Ocean reported a 5 percent year-on-year decline in net profit for 2021, with earnings falling to RMB 2.7 billion despite a 14 percent increase in revenue, according to its most recent annual report.
With China’s housing markets stalled and office leasing facing headwinds, Moody’s in April revised Sino-Ocean’s rating outlook to negative from stable and forecast a decline in contracted sales to RMB 120 billion in 2022 and 2023 from RMB 136 billion in 2021. The ratings agency also predicts that profit margins will come under pressure as the developer will likely need to offer price discounts to boost sales amid difficult market conditions.
Still, the agency expects Sino-Ocean to maintain good liquidity and have enough cash to cover its maturing debt over the next 12 months.
Note: This story has been updated to show that the transaction was completed at a 12 percent discount to the independent valuation. An earlier version of the story indicated a 2 percent discount. Mingtiandi regrets the error.