Tower of strength?

Pan: selling down prime assets

Pan Shiyi, chairman of SOHO China, made a recent appearance in the TV series Back to the Field, a show that puts a group of celebrities on a farm. In the episode he impressed viewers with his carpentry skills, knocking together a coop for the farm’s ducklings, as well as a table tennis bat for another of the guests.

Back in his real job, Pan is selling assets. Last week news surfaced that SOHO is looking to offload another eight office towers in Beijing and Shanghai, worth about Rmb60 billion ($8.56 billion). Sovereign wealth funds and private equity groups are among those said to have expressed an interest.

The latest round of asset disposals started in June, when SOHO announced plans to sell individual floors in properties it holds for a combined Rmb7.8 billion. More recently it sold parking spaces under nine of its buildings for Rmb761 million and last month it was said to have sold a portfolio of 11 of its co-working centres to Shenzhen-based shared workspace provider Dream Star for an undisclosed amount too.

What has caught the industry by surprise is the scope of the proposed sale of the office towers in Beijing and Shanghai. Back in 2017, Pan shot down speculation that he was looking to cash in on two of his prized assets. “SOHO Bund [designed by the late Zaha Hadid] is one we wouldn’t sell, the location is too important; we also wouldn’t sell Wangjing SOHO, it is too beautiful. I like it very much,” he said at the time. “As long as these two properties are still here, I am still a developer,” he added.

Indeed, even as recently as June, Pan was insisting that there was no plan to sell the eight properties.

Now he seems to have had a change of heart, with analysts saying that the move also indicates that SOHO is dispensing with its build-and-lease business model.

It first adopted the strategy in 2012, aping an approach used by many Hong Kong developers, who act as landlords and earn recurring income from office rentals.

The change in model didn’t have the anticipated impact, however, with SOHO’s operating income shrinking from Rmb15.5 billion in 2012 to just Rmb1.7 billion in 2018.

Four years ago Pan also started betting on the popularity of co-working spaces, launching SOHO 3Q, its co-working brand. The plan was to lease whole buildings at discounted prices, transform them and sublet them to smaller tenants. But 3Q has failed to lift SOHO’s bottom line. At its peak the brand had 30,000 co-working desks, with two new projects due to open before the end of the year. However, 3Q is still lossmaking (less of a surprise, given the reports of miserably low occupancy at WeWork’s offices in China) and Pan is now orchestrating a withdrawal from the sector.

Some commentators have been supportive of the sale of the office towers in China’s two best-known cities, predicting a further softening in the rental market in the months ahead. Office vacancy rates in Shanghai were 20% in the third quarter, according to property consultancy DTZ, and Beijing has suffered some of the biggest percentage declines in rental yields over the past three years of any of the world’s leading cities.

The premium end of the market is being hit hardest, with new supply of office space set to put further pressure on prices next year.

“Pan Shiyi selling the core assets suggests that he is not optimistic about China’s property market,” Zhang Ping, a popular financial blogger warned. “With the current economy in the doldrums, cash is going to be important for developers. He could use the money to pay down debt and acquire other small and medium-sized property developers. The move is very sensible.”

If completed in a single sale, the deal would be China’s biggest commercial property transaction, Bloomberg reported. Nevertheless, with little in the way of a land bank, other industry observers were worried about the commercial outlook for SOHO. “The [current] sale could help to boost its flagging operational revenue and profits. What’s more worrying is it doesn’t have much land resources for future sales,” Li Xiang, a research manager with Savills Beijing, told the South China Morning Post.

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