AIA Bags Shanghai Bargain with $716M North Bund Buy

Insurance giant AIA is diving into China’s commercial property sector by paying RMB 5 billion ($716 million) for a 90 percent stake in a retail-office complex in Shanghai’s Hongkou district, marking the largest cross-border investment in mainland real estate in recent months.

Announced last week, the deal by the Hong Kong-based insurer values the recently topped out, 230,568 square metre (2.5 million square foot) project at roughly RMB 5.6 billion. Municipal government-controlled investment firm Shanghai Industrial Holdings sold the property after investing nearly RMB 7 billion in the complex over the years.

“Against the backdrop of China’s ongoing opening-up for foreign investments, we see this as opportune timing for AIA to acquire this flagship project in Shanghai, the predominant commercial center of China,” AIA said in response to inquiries from Mingtiandi, adding that the company has been actively seeking investment opportunities in Chinese real estate, among other asset classes.

AIA’s wholly owned mainland subsidiary AIA Life Insurance will also shoulder loans the project company owed to the Shanghai branch of Japanese developer Sen Mansion, which previously had a 10 percent stake in the project. Following the deal, a joint venture b between Shanghai Industrial and Sen Mansion will retain a 10 percent interest in the property.

North Bund Bargain

Located in an area branded by city officials as the North Bund New CBD, the project marks the Fortune Global 500 insurer’s first major real estate acquisition in mainland China. Construction for the project on Tilanqiao Street began in 2018 and the complex is slated to open in mid-2023.

AIA’s North Bund complex sits on land lot HK324-01, which measures 23,037 square metres atop the Tilanqiao subway station in Hongkou district. A unit of Shanghai Industrial bought the parcel for RMB 3.26 billion in November 2015, according to the municipal government’s land auction database.

The project comprises a 180-metre-tall grade A office tower, shopping arcade, and theater built around the former residence of Nie Er, the composer of China’s national anthem, AIA Life said in a statement. Touted as a trophy asset, the mixed-use development overlooks the Huangpu River and the Lujiazui financial district in Pudong.

AIA is paying roughly RMB 24,288 per buildable square metre for the project. By contrast, Capitaland shelled out roughly RMB 30,238 per buildable square metre when it paid more than RMB 12.7 billion in 2018 to buy a neighbouring site from Shanghai International Port Group, which is now the 420,000 square metre Raffles City The Bund project.

“AIA has really snagged a good price for the North Bund project when the original owner looked to cash out. It’s a real bargain considering how much Singapore’s Capitaland spent to acquire a neighboring site,” an official with Hongkou District Investment Promotion Center said on the condition of anonymity.

To complete the project, AIA is expected to invest a total of RMB 8.7 billion.

Aiming High

While Shanghai has seen weak office leasing sentiment in recent quarters, AIA is confident that its new property will prove appealing to tenants.

“Integrating office, retail and cultural use seamlessly, coupled with the magnificent riverfront and superior infrastructure/connectivity, the project commands a unique competitive edge over current and future supply in the area,” AIA noted in the statement, adding that the project incorporates the highest levels of design sustainability and wellness features.

The company’s Shanghai-based AIA Life division won a license as China’s first life insurance provider wholly owned by a foreign insurer, with the company having since boosted its staff and agent headcount in the city to 6,800, according to Shanghai Securities News.

AIA, which was originally founded in Shanghai, has its mainland headquarters in a century-old edifice on the Bund waterfront, which the insurer has leased since 1996.

For its new acquisition the company said that, “The project is expected to generate attractive long-term returns and we intend to hold the property as a long-term investment for recurring income.”

Investors Return to Shanghai

The AIA purchase continues a flurry of transactions by institutional investors picking up bargain properties in Shanghai, as mainland China’s financial and commercial hub struggles to recover from months of lockdowns and public health restrictions.

Among these deals, Canadian asset management firm Brookfield bought a rental housing project in Shanghai’s Yangpu district for $180 million in September. The following month, an offshore entity of China Life bought a 10 percent stake in a Pudong office tower in which it was an anchor tenant for RMB 233 million.

And in November, Beijing-based Sunshine Insurance Group forked over RMB 1.18 billion for a healthcare retreat centre and office park in Shanghai’s Songjiang district.

A Cushman & Wakefield report noted that 14 large-scale commercial projects changed hands in Shanghai in the third quarter, totaling RMB 15.3 billion. Seventy-nine percent of the buyers were institutional investors, jumping from 42 percent in the first half of the year.

Leasing Remains Weak

AIA is making its bet on Hongkou’s office market as demand for desk space remains week in China’s commercial capital amid global economic uncertainty and the city’s Covid outbreak and restrictions.

Net take-up of office space in Shanghai totalled just 112,900 square metres in the third quarter, down 58 percent from the previous quarter and a drop of 67 percent from the previous year, according to a market report by Savills.

Excluding the 95,900 square metres of net absorption contributed by new developments occupied for self-use or via off-market leasing, the net amount of space leased in the city grew by just 17,000 square metres in the third quarter, the report adds. The citywide vacancy rate fell 0.2 percentage points in the third quarter to 14.6 percent, but will likely trend up again given the 1.9 million square metres in annual new supply projected for the next three years.

Prime and non-prime rents fell 0.3 percent and 1.0 percent to RMB 9.8 per square meter per day and RMB 7.1 per square meter per day, respectively, according to Savills.