Warburg Pincus-Backed KaiLong Leases SH Building to WeWork, Flips for RMB 500M

Buy a run-down hotel, fix it up for offices, lease to a co-working superbrand, and double your money by flipping the whole package to another fund. That simple recipe just helped Warburg Pincus-invested Kailong bring in a sum reported to be in excess of RMB 500 million ($74 million) for an 11,000 square metre building on Shanghai’s Yunnan Lu, according to information gathered by Mingtiandi.

KaiLong Investment sold the former Laurel Hotel earlier this week, according to a statement by the company, doubling its equity investment in the property just over 18 months after buying the 12-storey building in March 2015. The buyer, according to sources familiar with the transaction, was a fund controlled by Hong Kong-listed Tianli Holdings and managed by former ICBC, Ochs-Ziff and Morgan Stanley veteran Roy Kwok Oi Lung.

Kwok’s fund purchased the asset for a price said to be in excess of RMB 500 million after Kailong succeeded in leasing 10,000 square metres of the building near Shanghai’s People Square to WeWork. The US shared office provider is rapidly expanding its presence in China after recently closing a $690 million round of investment led by Beijing’s Legend Holdings and Shanghai’s Jinjiang Hotel Group.

Feeding Co-Working’s Hunger for Shanghai Space

Now known as The Konnect, Kailong sold the building to Tianli’s fund for approximately RMB 50,000 square metre after leasing it to WeWork for reported RMB 9 per square metre per day, according to sources who spoke with Mingtiandi. Renovation of The Konnect has recently completed, and there were no signs of WeWork’s own office build-out in place when Mingtiandi visited last week. The coworking provider plans to open the tower as its third Shanghai location before the end of this year.

Kailong had acquired the former 3-star property via its maiden US dollar investment vehicle, KaiLong Greater China Real Estate Fund, which held a $238 million closing in May of 2015. “When KaiLong purchased the hotel, the goal was to capitalize the asset’s potential value through repositioning and redevelopment,” Ivan Ho, Managing Director at KaiLong explained. “After one year of refurbishment, KaiLong’s ground team transferred it from an outdated business hotel to a chic boutique office.”

Kailong credits its experienced team with helping it renovate and ultimately resell the building within a tight timeframe. “Project redevelopment could be risky for most of the players in the market. We are able to create detailed and custom-designed plans to manage each asset’s unique objectives that others might see,” Ho pointed out. Prior to buying the hotel, Kailong, which is run by former Shui On Land executive Heiming Cheng, was best known for purchasing and repositioning a portfolio of business parks around the Shanghai area.

KailLong Preps For Second US Dollar Fund

The sale of the Yunnan Lu property is timely for Kailong, which is now preparing to launch a potential second US dollar fund.

“After successfully deploying capital for five investment projects as well as securing the first exit with the maiden US dollar fund, we are expecting to deploy all capital later this year or early next year,” Ho stated. “We are also likely to market the second US dollar fund in the first half of 2017.”

Kailong could receive a boost in any potential fund-raising from its tie-up earlier this year with Warburg Pincus. The US private equity giant acquired a 40 percent stake in Kailong in April through its majority-owned subsidiary industrial development subsidiary D&J China.

Also in April, KaiLong purchased three office assets in London – two in the City of London financial district and a third in the central district of Southwark. Those acquisitions brought the total value of KaiLong’s assets under management in London to more than ₤100 million ($142 million).