HK-Listed Spring REIT Buys Guangdong Mall From Huamao Property for $241M

Spring Real Estate Investment Trust has acquired its first retail asset in China as the Hong Kong-listed REIT announced late last week that it has agreed to purchase a shopping mall just north of Shenzhen for RMB 1.65 billion ($241 million).

Spring REIT is purchasing Huamao Place in Huizhou, a city in southern China’s Guangdong province, from Huamao Focus Ltd, an affiliate of mainland commercial property developer Beijing Huamao Property.

The acquisition allows the Japanese-managed REIT to add the seven-story shopping mall to a portfolio that includes a pair of buildings at China Central Place in Beijing and a network of 84 British automotive repair shops.

Buying a Fully Occupied Mall

The 144,925 square meter retail development, currently the second largest in coastal Huizhou, is part of the Huizhou Central Place integrated development which comprises three grade A office towers, a trio of condo blocks and a serviced apartment building. Huizhou, which had a population of 4.75 million in 2016, has gained more attention from investors in recent years for its location between Guangzhou to the west, Shenzhen and Dongguan to the southwest, and its southern border on the South China Sea.

“We believe the acquisition will prove accretive and bring improved earnings, and accordingly enable us to deliver quality, long term cash flow to unitholders,” Toshihiro Toyoshima, chairman of Spring Asset Management Limited, which manages the REIT, said in a statement.

The decade-old mall is only 10 minutes away from the Yunshan Station on the Dongguan-Huizhou Intercity Railway and the upcoming Huizhou Metro Line 1. The CBD property has an eclectic mix of tenants including Calvin Klein, Gieves & Hawkes, Zara, Samsonite, Watson’s and Starbucks.

Pearl River Delta Mall Now 97% Occupied

According to Spring REIT, Huamao Place has been maintaining an occupancy rate above 92 percent since 2012. As at 31 July 2018, the property was 97.2 percent occupied, exceeding the city’s mid to high-end retail market average occupancy rate of 91.8 percent as at the end of June 2018.

Driven by Huizhou’s rapidly developing retail market, Huamao Place’s rental growth is projected in the range of eight percent to nine percent annually between 2018 and 2021, with an average occupancy rate staying around 96 percent to 97 percent for the next two years.
Toyoshima also pointed out that the acquisition should enable Spring REIT to diversify and boost the value of its property portfolio by investing in the convergence of Hong Kong and southern China through the government’s Greater Bay Area initiative.

The consideration, financed by RMB 110 million in cash drawn down from an offshore facility and issuance of new units in the trust, represents an approximate 18.5 percent discount to the appraised property value (being RMB 2.029 billion as at 30 June 2018) and gives an annualized gross property yield of 9.4 percent and net property yield of 7.5 percent, according to a company statement.

Beijing Huamao Property was founded in 2006 and operates as a subsidiary of Beijing-based China National Arts & Crafts (Group) Corp, a central government enterprise directly controlled by China’s SASAC, the State-owned Assets Supervision and Administration Commission of the State Council.

Spring REIT Signs Up for the Greater Bay Plan

“The acquisition of this high-quality asset represents an important strategic step for Spring REIT to tap the vast potential of the Greater Bay Area, diversifying and boosting the value of its property portfolio,” Spring Asset Management’s Toyoshima added in the statement.

Huizhou, along with 10 other cities in Southern China, forms part of the Chinese government’s ambitious Greater Bay Area initiative which aims at merging the growing cities of Guangdong province with Hong Kong and Macau to produce a regional economy that would rival the biggest in the world. The area, with its nominal GDP of over RMB10 trillion, accounted for 12.4 percent of China’s total GDP in 2017.

Spring REIT, which was listed in Hong Kong in 2013, owns and invests in income-producing real estate primarily in mainland China, while seeking yield-accretive investment opportunities globally, according to the REIT manager.

Huizhou Mall Acquisition Returns REIT to China Commercial Assets

The listed trust was the first Hong Kong REIT to offer direct exposure to two premium-grade office buildings in the China Central Place complex in Beijing’s CBD, when it was listed in 2013, but ran afoul of one of its largest unit-holders last year, when it decided to acquire 84 UK car maintenance facilities in the UK, from a company controlled by Japan’s Itochu Corporation, which is also one of the principal investors in the REIT’s manager.

Hong Kong-based private equity fund manager PAG Real Estate wrote formal letters to Hong Kong’s Securities & Futures Commission (SFC) and the Stock Exchange of Hong Kong (SEHK) in October last year to demand “appropriate action” against Spring REIT following the planned UK acquisition, highlighting potential conflicts of interest and asking to remove the REIT manager.

Ultimately PAG, a minority unit-holder, was unable to deter the planned UK acquisition. Inquiries from Mingtiandi regarding the Hong Kong PE firm’s outlook on the Huizhou deal went unanswered at the time of publication.