Faced with disappointing leasing revenues for its portfolio of Shanghai and Beijing office properties, Soho China announced today that it would sell its Soho Century Plaza office project in Shanghai for an undisclosed sum.
At a press conference in Hong Kong, the developer’s chairman Pan Shiyi said that selling the 42,000 square metre office project on Century Avenue in Pudong’s Zhuyuan area would allow it to take advantage of the city’s hot market for investment properties.
SOHO’s sale of the grade A office building also appears motivated by a shortfall in leasing revenue for its commercial real estate projects in Shanghai and Beijing, with the company controlled by Pan and his celebrity wife Zhang Xin saying today that its net profits slid by 87 percent in 2015.
Build and Sell Instead of Build and Hold?
Soho announced in 2012 that it would move away from its earlier model of building commercial properties to sell off individual units (known as strata title sales) in favor of creating higher value buildings that it would hold and lease out.
However, with net profit falling from RMB 4.08 billion in 2014 to just RMB 1.05 billion in 2015, the company may be turning to en bloc sales entire commercial buildings to improve its profit picture.
“The market is hot, why not catch the opportunity and make money?” Pan was quoted as saying in the South China Morning Post. “The price is not set yet, but for sure the return will be much higher than home sales in Shanghai.”
Pan did not specify a buyer or a transaction price for the office property, which is located near the Lujiazui financial district, but the property billionaire did indicate that Soho, which according to its website has a portfolio of 17 properties in Beijing and 12 more in Shanghai, could sell off more of what it terms non-core assets. Soho had acquired the 24-storey project in 2011 for RMB 1.89 billion, and according to its website had fully leased out the the space, with rental rates peaking at RMB 9 per square metre per day.
2016 could be a good year to sell investment grade properties in China’s first tier cities, with record high prices having been set for prime office assets in recent months.
In July last year Hong Kong’s Link REIT paid a record RMB 79,380 per square metre to acquire the first phase of the ultra-prime Corporate Avenue complex in Shanghai’s Xintiandi area. And not far from Soho Century Plaza in Pudong, Carlyle Group and CLSA Capital Partners sold an office tower to Hong Kong-listed Yuexiu REIT for RMB 2.63 billion ($423 million) during August.
In 2014 Soho sold two of its projects in Shanghai to shore up its balance sheet, with state-run Financial Street Holdings buying Soho Hailun Plaza in Hongkou district for a reported RMB 3.06 billion, and Soho Jingan Plaza for RMB 2.18 billion.
Leasing Strategy Has Yet to Pay Off
Since launching its leasing-driven business strategy in 2012, Soho China has been promising investors that the precipitous drop in the company’s revenues was just a temporary phase before income from leasing replaced the loss of strata sales inflows.
In 2015, however, the company seems to have not yet turned the corner with core profit – excluding property sales and revaluations – dropping 76 percent to RMB 423 million, down by 84 percent compared to 2014.
There did seem to be some improvement in the company’s leasing results, however, with Pan indicating that office rental income totalled RMB 1.05 billion last year, according to the account in the SCMP.
During 2015 SOHO adopted an online strategy to lease out office space in what it calls its’ SOHO 3Q centres. The co-working spaces, which are modelled on the successful WeWork platform in the US allow companies and individuals to lease out space in selected Soho properties in Shanghai and Beijing by the week or month via an Internet platform.