Overseas Chinese Town Plans Sale of 50% Stake in RMB 11.5B Shanghai Project

Shenzhen-listed Overseas Chinese Town is selling its 50 percent ownership in a 110,000 square metre, RMB 11.5 billion project in Shanghai’s downtown Jing An district, according to a filing by the state-backed real estate developer to the China Beijing Equity Exchange.

Overseas Chinese Town, known in the market as OCT, is making available its half-stake in a 50-50 joint venture with fellow Shenzhen state-owned developer China Resources Land named Shanghai Huahe Real Estate Development Ltd (上海华合房地产开发有限公司), for an undisclosed amount.

The announcement of the planned sale on the equity exchange, where state-run entities are required to make available any significant assets prior to a disposal, is believed by some analysts to be an attempt to regain financial liquidity, as it comes a week after the state-backed developer’s filing to the Chongqing Assets and Equity Exchange shows that it is also selling 100 percent of its equity in a Hainan project.

In the same month before revealing the Hainan sale, OCT also filed to the Beijing Equity Exchange its plan to part with a 51 percent stake in a pair of Chengdu developments at a time when many mainland developers find themselves squeezed financially between slowing home sales and tighter lending conditions.

Building a RMB 11.5 Billion Project Along Suzhou Creek

Public records show that in 2016 OCT and China Resources Land jointly won a land auction for a project along the north bank of Suzhou Creek dubbed Suhewan Central Park for RMB 6.93 billion, in what had formerly been Shanghai’s Zhabei district. The mixed-use project, which is composed of a number of connecting plots, is approved for construction of up to 182,300 square meters of above-ground gross floor area and follows up on OCT’s neighbouring super-deluxe Shanghai Suhewan project.

The Shanghai Suhewan project, which contains numerous phases, in June opened the Bulgari Hotel, and penthouse homes in the project were put on the market at an asking price of RMB 190,000 per square metre.

OCT and China Resources Land set up a pair of subsidiaries for development of the newly acquired site. Of the two, the target company in the proposed sale, Shanghai Huahe, is responsible for 110,000 square metres of the overall project, and according to government zoning requirements, must be composed of 50 percent office space, 20 percent retail and 30 percent residential along with 1,500 square meters of greenery. The project broke ground in 2016 and the joint venture aims to complete the undertaking by 2020, having invested a total of nearly RMB 11.5 billion, after putting some RMB 4.5 billion into construction and other development costs.

The yet-to-be-completed Suhewan Central Park has not yet commenced pre-sale of homes, and in the first half of 2018, the project took on two short-term loans of approximately RMB 2 billion, according to a report in local business news site Jiemian.com. As of September 30, the target company Shanghai Huahe had total registered assets of RMB 3.82 billion while its total liabilities stood at RMB 2.33 billion.

OCT Building Biggest Project Ever in Shanghai

OCT, known for the Shenzhen-based theme park Window of the World with its miniature replicas of the world’s most famous tourist attractions, embarked on the high-end Shanghai Suhewan project in 2010, with the stated goal of creating a landmark development.

With a site area of 71,000 square meters, not including Suhewan Central Park, this initial phase of the project encompasses the award-winning Waterfront Independent Mansions semi-detached homes, the Bulgari Hotel and Residence, apartment-style offices, boutique business premises and studios for artists. Among its offerings, the RMB 100 million-plus Waterfront Independent Mansions residences set a new price benchmark among luxury residential properties in Shanghai.

The earlier Shanghai Suhewan project sits on a trio of land parcels acquired by OCT in 2010, including a single site that the company paid a record-breaking RMB 7.02 billion, which works out to RMB 52,800 per square meter. Together with a pair of connected parcels which the developer acquired for a combined RMB 1.79 billion that same year, Shanghai Suhewan became OCT’s largest single investment to date.

Two years later in 2012, to kick start the development process, Shenzhen OCT transferred its 50.5 percent stake in the still nascent project to its sister company, Hong Kong-listed Overseas Chinese Town (Asia) Holdings for RMB 2.23 billion. Media reports at the time cited government-imposed market restrictions and tightening funding channels as reasons for the group to transfer the stake in the project to its offshore affiliate.

OCT Revenues Drop 52% in 2018

OCT Asia’s latest interim report shows that the group recorded revenues of approximately RMB 930.44 million during the first half of this year, representing a decrease of approximately 52.1 percent as compared with the same period of 2017. The decline was mainly due to a sharp drop-off in revenue from sales of its existing Shanghai Suhewan Project under the impact of the real estate regulatory policies.

As Chinese authorities fight to keep average home prices low, particularly in the first tier cities, high-priced central city projects such as Shanghai Suhewan have seen sales slow to a trickle.

These latest project sales by the Shenzhen developer come after Overseas Chinese Town collected RMB 20 billion in 2017 by transferring land use rights for projects in Beijing, Shanghai, Chongqing, Nanjing and Nanchang, according to the local Chinese press.

In the first six months of 2018, OCT recorded net operating cash flow of negative RMB 8.29 billion, but the Chinese firm has not slowed its pace of land acquisition.

Earlier this month, OCT purchased a pair of mixed-use sites totaling 19,465 square meters in the center of Shenzhen’s Bao-an district for RMB 4.2 billion ($605 million). In the first half of 2018 alone, Shenzhen OCT added 10 land parcels, totaling 1.38 million square meters into its reserve.

At an investor relations event in September, the company denied that it is facing any capital pressure; however, if presented with the right opportunity, it is prepared to invest to acquire more quality land reserves.