Profits Drop 47% for Soho China as Developer Struggles with Strategy Shift

Soho’s drop in profits is all down in black and white

Beijing-based real estate developer Soho China reported a 47 percent drop in profits for the second half of 2013, as the developer which made its name building office complexes and then selling off individual units, struggles to switch to a new business model.

Soho, which was among the most aggressive acquirers of commercial real estate assets in China during 2011 and 2012, has seen its fortunes fade as it struggles to digest what it devoured in its rapid expansion.

Although the company, which is controlled by property industry glamour couple Pan Shiyi and Zhang Xin, had reported a year on year profit jump of 242% for the first half of 2013, bringing in RMB 2.1 billion in the period. It apparently was not able to sustain this pace throughout the year.

At present the developer’s disappointing results are said to be caused by difficulties caused by its 2012 decision to shift from its former strata-sales model to its new build-and-hold strategy, which relies on earning decades of rental income, rather than making quick money from selling individual units.

The 2012 strategic shift had followed a 65 percent drop in profits, and a 5.3 percent decline in Soho’s share price.

Estimates from Reuters put Soho China’s net profit for July to December last year at RMB 5.3 billion ($862 million), based on the company’s full-year results. While that was more than the figure for the previous half-year, it was still much less than the RMB 9.97 billion the company earned a year earlier, and indicated large fluctuations in Soho’s income.

Selling Assets Below Asking Prices

Last Friday Soho announced that it is selling two commercial projects in Shanghai for RMB 5.23 billion ($851 million), well below the original asking price.

The company sold Soho Hailun Plaza in Hongkou district for a reported RMB 3.06 billion, and Soho Jingan Plaza for RMB 2.18 billion to state-run Financial Street Holdings includes equity in the projects as well as associated loans.

Analysts familiar with the deals say that Soho, which had taken on 11 development projects in Shanghai, was facing difficulties in managing the process of building, leasing and maintaining its portfolio. Falling office rents in Shanghai have also made the properties less appealing as a medium to long-term asset.