I Owe, I Owe, So I’m Selling to SOHO

The extent to which China’s real estate restrictions are forcing consolidation in the industry was underlined yesterday when debt-saddled developer Greentown announced that its Greentown Plaza project in Shanghai’s Hongqiao area would be sold to SOHO China for RMB 2.14 billion.

SOHO will acquire 100% of the project on Tianshan Lu near the intersection with Zunyi Lu (see the map below) from Greentown, which currently holds 70 percent of the shares, and Maanshan Development, which has the remaining 30 percent, according to statements filed separately by SOHO and Greentown to the Hong Kong stock exchange yesterday.

With a projected gross floor area of more than 172,200 square meters on a 25,594 square metre site, the project will include grade-A offices, retail and a five-star Hyatt hotel.

View Mingtiandi Commercial Real Estate Map in a larger map

So with office rents increasing at record rates in Shanghai, and retail space going for an even higher premium, why is Greentown selling? Because it borrowed too much money for speculative residential projects that it now cannot sell.

Commenting on the sale in a statement, Greentown chairman Song Weiping said, “The sale will strengthen the group’s cash flow and increase its working capital to maintain the liquidity and conserve more financial resources for the funding of future investments when opportunities arise.”

What he really means is, “If I don’t pay the banks next month, then they will take everything.” Really.

According to a recent report from credit research firm Jefferies, Greentown reported cash holdings of RMB 5.9 billion at the end of 2011. However, it has RMB 16 billion in short-term debt due this year. In what may be a strange coincidence with the timing of the Greentwon Plaza project, the company has a US$1.74m debt payment due on May 8th and a RMB 178 million puttable convertible bond set for May 18th.

And these events come soon after Greentown’s fellow Hangzhou-based developer, Hangzhou Glory filed for bankruptcy last week.

All of this desperation has led to opportunity for ultra-aggressive commercial developer SOHO who already bought out Greentown’s stake in a project on the Bund last year, and have now snatched up 11 commercial property project in Shanghai since entering the market in 2009.

Commenting on the transaction in a statement, SOHO chairman Pan Shiyi called the deal a “good buy” and the company, which specialises in developing strata title commercial projects, expects to start selling units for at least 65,000 yuan per square meter by the end of 2013.

This tale of two developers shows the good fortune of those companies like SOHO which have been focussing commercial real estate for some time, versus the companies that took on too many residential projects such as Greentown.  Lower residential property prices and a dropoff in housing transactions – the consequences of restrictive regulatory policies – have put a choke hold on the cash flow of these housing developers.