New World Development has added a Shanghai project to its mainland commercial portfolio, winning an uncontested land auction for a site on Huaihai Road with a RMB 4.1 billion ($590 million) bid, according to an official announcement today.
The land purchase gives the Hong Kong-based developer the opportunity to develop 68,683 square metres (739,300 square feet) of office and retail space along one of Shanghai’s busiest commercial strips, on a site just two blocks from where the company completed its 59-storey Hong Kong New World Tower (now K11 Shanghai) in 2004.
While Shanghai currently faces a glut of new commercial projects, New World, which currently has some 46 investment properties in mainland China, was able to purchase the prime site without competition.
Adding to a Glitzy Strip
“We have successfully won the bid for Middle Huaihai Road land parcel, Huangpu District by taking the advantages of the premium brand of “New World Group” and the synergies of its diversified business,” New World vice chairman and CEO Adrian Cheng said in a statement.
Keeping the focus on his drive to put his own stamp on the property and retail empire started by his grandfather, Cheng Yu-tung, the younger Cheng added that, “I will continue to lead the team to bring artistic and cultural elements to the city in an unconventional way, enrich people’s lives, and promote business development through disruptive innovations.”
New World’s 17,171 square metre site is located just behind a renovated building on Huaihai Road that is home to a boutique jointly operated by luxury brand Hermes and its local brand Shang Xia, with the project stretching south to Taicang Road. The developer is paying the equivalent of RMB 59,845 per square metre of above ground gross floor area for the project.
The plot borders Huaihai Park to the east and will form a bridge between that urban oasis and a pair of Hong Kong owned projects, Great Eagle Holdings’ Andaz Hotel and Lai Fung Holdings’ Hong Kong Plaza, which are separated from the parcel’s western boundary by Songshan Road.
James Macdonald, head of research for Savills in China sees the project fitting into the renovated “old Shanghai” vibe of Xintiandi, rather than becoming just another tower.
“There will be some historically preserved structures that will mean the site will be open plan to a certain extent,” Macdonald noted, “while also with a key focus on arts and culture and focusing on high-end fashion so it should be in keeping with the surroundings.”
Huaihai Lu Ups Its Retail Game
Situated just north and east of Shui On Land’s Xintiandi commercial and entertainment project, the site forms part of what has been one of Shanghai’s glitziest areas, with Hong Kong Plaza hosting an Apple store and the flagship Tiffany location in the city, although the strip has lost ground recently as newer projects have opened in competing districts.
“The retail market is always evolving and certainly the Huaihai Middle Road market has lost some appeal when compared to Nanjing Road with HKRI Taikoo, or Xujiahui with Grand Gateway and ITC,” Savill’s Macdonald said, referring to Swire and HKRI’s elite development in Jing An district and Sun Hung Kai’s mega-sized ITC project in Xuhui.
“The new development will help to enhance the location, bridging the gap along Songshan Road between Corporate Avenue, luxury hotels and Hong Kong Plaza, and provide the Shangxia/Hermes location more critical mass in the luxury market,” he added.
No more than 65 percent of the above ground area of the project may be developed for office use, and 35 percent must be dedicated to retail purposes, according to the terms of the tender.
The site is within a few minutes’ walk of the entrance to the Huangpi Nan Lu station on Shanghai’s metro line 1 and is the first plot to be made available on the traditional shopping street in two decades.
Buying into a Down Market
Including underground and ancillary elements of the project, New World is allowed to develop up to 128,683 square metres of space on its new site, but it will be adding that fresh real estate to a Shanghai commercial market which is currently mired in a downturn.
While Shanghai has seen office vacancy city-wide reach 20 percent this year, the Huaihai Road area averages 11 percent empty space as of the end of the second quarter, with typical effective rentals at around RMB 7.5 per square metre per day, according to Savills. Across Shanghai office leasing rates fell by 4.0 percent during the period from April through June — the city’s worst performance since the 2009 global financial crisis.
On the retail side, vacancy along Huaihai Road averaged 7.9 percent at the end of June, with rental average RMB 38.2 per square metre per day on the first floor. During the second quarter, city-wide retail rents in Shanghai fell by 1.9 percent from the preceding three months, as mall vacancy rates climbed by 3.1 percentage points.
In a statement, New World China Land CEO Echo Huang, the company’s top mainland executive, painted the purchase as an endorsement of China’s future and the company’s allegiance to the market. “Faced with so many uncertainties, we still have strong confidence in investing in the mainland and seek shared development with the nation,” she said.
The price that New World is paying for its Huaihai Road site is paying RMB 4,254 per square metre more than what a Shui On Land-led joint venture paid for a nearby project in July 2018.
In that JV with Shanghai-based China Pacific Insurance and developer Shanghai Yongye Group, Shui On paid RMB 55,600 per square metre for the rights to develop up to 242,689 square metres of commercial space on a plot which borders Xizang Road to the east and is located one block south of New World’s latest prize.
A Priority Project in a Golden District
Indicating the project would be added to the group’s K11 set of properties under Adrian Cheng’s signature brand, the company linked the land sale decision directly to the group chief executive’s persona, noting that, “By virtue of his extraordinary assertiveness, sharp and unique insight, and innovative business thinking, Mr. Adrian Cheng scented out the scarcity value of the land parcel, as well as the infinite potential and possibilities thereof.”
The terms of the land sale made it open only to companies cooperating with art and cultural institutions, and required interested bidders to make a deposit of RMB 1 billion, as well as to preserve a pair of historical buildings which currently occupy a portion of the site along Songshan Road. Government statements made no mention of other developers expressing interest in the project.
The local district had earmarked this as a priority project, as it had with Shui On’s Taipingqiao project to spearhead the urban rejuvenation in what has been known as a golden retail precinct in Shanghai,” remarked Jim Yip, head of capital markets for China at JLL, referencing Shui On Land’s 2018 site acquisition.
“In the process, the government has talked to a number of selected developers and scrutinised their schemes and capability,” Yip said. “Price is not the only consideration, with the overall planning and the developer’s reputation also entering in.”
The winning bidder is required to begin work on the project within six months and to complete development no later than 36 months after beginning construction.