Real estate developer SOHO China's plan to expand outside of Beijing by acquiring an office building in Shanghai for over 2 billion yuan has been termed a lackluster move by property analysts.
The Hong Kong-listed developer has agreed to acquire Donghai Plaza, a 52-storey office and retail complex, on the prosperous West Nanjing Road for 2.45 billion yuan from the real estate arm of Morgan Stanley, the company said in a filing to the Hong Kong stock exchange on Tuesday.
The transaction marks SOHO China's entry into the highly overpriced Shanghai realty market. The company is the largest realty developer in Beijing.
SOHO China said it expects to complete the acquisition of the 71,571-sq-m Shanghai property by Sept 1 and will sell or lease the building after rebranding it.
"The deal was over-priced given the notorious history of the building and we really doubt whether any further value can be added," said Lu Qilin, deputy director, Uwin Real Estate Research Center.
Morgan Stanley bought the office building, which is about 30 percent rented at present, for about 2 billion yuan in 2006 to become the sixth operator of the commercial complex, which was firstly established in 1994.
"SOHO China appears very cautious in investment outside Beijing, but its ample cash on hand has to go somewhere to get higher returns," said Chen Xiaobo, real estate analyst, First Capital Securities.
Property tycoon Pan Shiyi, SOHO China's chairman, said in the company's 2008 full-year earnings report that it has about 20 billion yuan capital available for acquisition purposes.
"Our business model of selling commercial properties in the most dynamic city centre areas... has already earned considerable success in Beijing. We are confident that this model can be applied to Shanghai as well," Pan was quoted by Reuters as saying.
However, according to property brokerage CB Richard Ellis, the prime office markets in China's major cities, including Shanghai and Beijing, have been witnessing plummeting rents in the second quarter due to weak demand.
The overall rate of return on the lease of the Donghai Plaza is likely to be lower than at present, regardless of SOHO China's possible abundant of cash investment into marketing and branding to prove the quality of the building to customers, Lu said.
"The road for SOHO China in Shanghai appears bumpy," said First Capital's Chen.
H shares of SOHO edged down 0.46 percent to end at HK$4.36 yesterday.