Soho China buys Shanghai property from Morgan Stanley fund

Soho China, the Beijing-based commercial property developer, has made its first move into Shanghai with the purchase of a 52-storey office and retail building from Morgan Stanley's real estate investment arm. According to a release issued yesterday, Hong Kong-listed Soho China will buy the company that owns the property at a total cost of Rmb2.45 billion ($359 million) plus an amount equal to the working capital held by the company when the deal closes.

Cash-rich Soho China has been pondering an expansion into Shanghai for some time and said the location of, and easy access to, this property at the heart of Nanjing Road West CBD in the city's prosperous Jing'an business district were "compelling attributes" for the acquisition. The area includes a concentration of five-star hotels and high-end shopping centres as well as two metro lines and Shanghai's main east-west thoroughfare, the Yan'an Elevated Highway. The property is within walking distance from city landmarks like the Portman Ritz-Carlton Hotel, Plaza 66 and the Kerry Center Shanghai.

Soho China's CEO Zhang Xin also told FinanceAsia over the phone last night that, while residential real estate prices in Shanghai have been bid up significantly in recent months, potential commercial properties are still "relatively distressed" and vacancy rates are high. Or as the company put it in the press release: "Shanghai commercial real estate is undervalued with sufficient upside appreciation potential."

This particular building, which is currently known as Dong Hai Plaza but will be rebranded as The Exchange-Soho, is not distressed in the classic sense as construction was completed in June 2008. However, leasing has been slow to pick up and at present only 30% of the building is occupied. All the tenants are multinational companies.

Soho China believes its business model, whereby it sells its office developments on a strata basis to high-net-worth individuals or companies, most often as a pure investment, is well suited to this situation and Zhang notes that the company's buildings in Beijing are on average more than 95% rented, compared with a 70% occupancy rate for Beijing office properties in general. A contributing factor is no doubt the after-sale services that Soho China provides to the high-net-worth acquirers to help them lease the strata units to small- and medium-sized companies.