Property

Soho’s golden age

The high profile developer scoops up distressed buildings in Beijing and Shanghai

Soho's Sanlitun project in Beijing

Whenever the subject of China’s property market comes up in the WiC office, images of Johnny Depp’s compass in Pirates of the Caribbean spring to mind: one minute the needle spins one way, the next minute it is spinning the other, making it all a little hard to fathom.

Current data suggests the needle is spinning in a positive direction for home sales, at least, and that the housing market could have bottomed out.

But commercial property is not faring as well, with vacancy rates in Shanghai at 14.2% at the end of the same period. Pudong, the location for the city’s financial centre Lujiazui, had close to a quarter of its premium space empty. Commercial rent levels across Shanghai were down by a similar proportion.

Shanghai is not the only city facing a glut of unoccupied offices. The vacancy rate in Beijing was 12% at the end of March, up from 9.29% a quarter earlier. Average rents fell by close to a tenth to Rmb207 ($30.4) per square metre.

Worse yet, analysts reckon that 1.3 million square metres of new supply will become available this year, mostly in the central business district, where many multinational companies are based. That’s more than double the 603,000 square metres of new office space Beijing saw released in 2008.

With soft demand, rental yield weakness and a forecast of a surge in new office supply, the prospects for the commercial property market do not look especially encouraging.

But perhaps they are more attractive to those willing to take a contrarian view.

Enter Soho. The largest commercial developer in Beijing is planning to buy into distressed and unfinished projects in China’s two leading cities.

Zhang Xin, CEO of Soho, confirmed to FinanceAsia magazine: “We will buy a lot. We have at least 10 projects that all qualify in Beijing and Shanghai [some are completed and some half-built]. I don’t know how many of those we can close in the near future, but I think quite a few of them.” If it bought all 10, it would more than double its existing inventory.

Unlike many other property developers, Soho has funds available. At least Rmb10.7 billion ($1.6 billion) of cash is left over from an initial public offering in Hong Kong in 2007; and this week it added to its cashpile with a $360 million convertible bond.

Until recently, Soho’s acquisition strategy has been a conservative one, although it did snap up an unfinished 500,000 square metre building – the Kaiheng Centre – in Beijing. The previous owner had run out of money.

“Our strategy is in a bull market, keep very little leverage and sell as much as you can, and in a falling market, leverage up and buy as much as you can,“ says Zhang.

Industry experts agree that this could be a perfect opportunity to buy. “In 10 or 20 years down the line, when Shanghai has increased its importance in the Asia-Pacific region, people might look back on now as a golden age for buying commercial property, since the long-term trend is going to be upwards,” says Shaun Brodie, associate director for research at DTZ, a real estate advisory firm, in Shanghai.

So if this really is a “once in a lifetime” opportunity for buyers of distressed property assets, why isn’t everyone diving in?

For a start, it can be hard to reach agreement on price. Previously employed valuation models are under pressure, with buyers and sellers often disagreeing on risk-and-return assumptions. Brodie also says there is an expectation gap between sellers and buyers that is tough to bridge.

More generally, many potentialinvestors lack the stomach for riskier positions. Soho itself seems to be made of sterner stuff, having built up an impressive track record in redeveloping distressed properties in the past.  Shui On, a Hong Kong-based property developer, has also recently shown itself adept at picking winners. However, these two firms are exceptions rather than the rule, and others may prefer to remain on the sidelines until the market outlook is clearer.

But if its strategy is right, this could well be Soho’s “golden age”.


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