SRE Group is seeking a buyer for its 51 percent stake in a mixed-use project in Shanghai, as the unit of China Minsheng Investment Group tries to stem escalating losses in the wake of an embezzlement scandal that saw its chairman arrested earlier this year.
The Hong Kong-listed developer said in a stock filing last Friday it had posted the controlling interest in Shanghai Rich Gate I, a high-end residential, retail and office development in the city’s Huangpu district, on the Shanghai United Assets and Equity Exchange public marketplace at a reserve price of RMB 1.8 billion ($250 million).
Under the terms of the proposed sale, the potential buyer will also agree to take on a shareholder’s loan amounting to RMB 846 million.
The move to sell Shanghai Rich Gate I comes just under two weeks after the developer announced a loss attributed to shareholders for the year ending 31 December 2019 of RMB 2.3 billion.
SRE Group is also in default on RMB 200 million in loans, which became payable immediately after being “triggered by the deterioration of the financial conditions” of China Minsheng Investment Group, according to the company’s 2019 annual report as issued on 17 May. In addition, RMB 1.2 billion in long-term bank borrowings became immediately payable on demand as a result of the arrest of former chairman, Peng Xinkuang.
Offloading a Luxury Project
Located at 717-719 Daxing Street and spanning eastward to Yingxun Road in what was once the old quarter of the city, the Shanghai Rich Gate I mixed-use project is approved for development of 72,660 square metres of housing, 48,600 square metres of offices, and 9,244 square metres of retail space.
The luxury project stretches from Zhonghua Road and Huangjiaque Road in the north down to Lujiabang Road, and is located around 15 minutes walking distance from the Laoximen metro station on Shanghai’s metro lines eight and 10.
After acquiring the plot in 2004 and signing a relocation agreement with the government in 2014, SRE Group has yet to complete relocation of existing residents of the site.
Construction of Richgate 1 can begin once the project owners succeed in coaxing current occupants of the 37,129 square metre (399,653 square foot) prime slice of Shanghai into relocating, with completion expected by 2023, according to the developer’s bourse filing.
The project is located just over 1.5 kilometres west of a site at Dongjiadu Road and Zhongshan South Road in Huangpu district which SRE Group’s parent firm, China Minsheng Investment Group had exited in February of last year after defaulting on a bond payment.
In that transaction, CMIG had sold its remaining 50 percent stake in what is now the Greenland Bund Center to city government-backed Greenland Group for RMB 12 billion.
High-End Sales Face Hurdles
Mingtiandi understands that the developer has opted to sell the ownership interest in the project via public auction after potential suitors for the high end development had been put off by risks posed by city’s price cap on residential sales in the city.
Savills’ head of research for China, James Macdonald, said that although these caps – which regulate the selling prices of residential property to suppress price inflation – have been relaxed in Shanghai, they have not been completely removed.
At current market rates, apartments in the project could fetch as much as RMB 120,000 per square metre on completion, while centrally managed offices in the area could rent out for up to RMB 8 per square metre per day, depending on the quality of the development.
New Leadership in Place
SRE Group’s search for a buyer coincides with leadership challenges the company is facing as in the wake of the arrests on embezzlement charges of former chairman and CEO Peng Xinkuang and former executive director Chen Donghui at the beginning of this year.
Following the criminal procedures, Lei Dechao, chairman of China Minsheng Investment Group subsidiary China Minsheng Jiaye, took over as chairman of SRE Group in February after SRE executive director Zhu Qiang had been promoted to chief executive in January.
The remaining 49 percent interest in Shanghai Rich Gate 1 is held by Shenzhen-listed Hangzhou Binjiang Real Estate Group which purchased the stake for RMB 2.31 billion in 2016.