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Soho China

Softer office markets cloud China property outlook

Despite strong first-half gains, Soho China and Franshion face challenges when the slowing economy pressures rents in Beijing and Shanghai

PUBLISHED : Tuesday, 20 August, 2013, 2:39pm
UPDATED : Wednesday, 21 August, 2013, 3:51am

Commercial property developers Soho China and Franshion Properties (China) posted robust half-year results yesterday, but their major office markets in Beijing and Shanghai are expected to soften as the mainland's economic growth slows further.

Soho, the largest developer of offices in those cities, said underlying profit, excluding property revaluation gains, surged 130 per cent to 537 million yuan (HK$680 million) year on year on strong property sales.

The firm has been moving from a "build to sell" strategy to "build to hold" since August last year. Its first project available for leasing, Soho Century Plaza in Shanghai's Pudong district, is fully occupied. About 60 per cent of the office space at Galaxy Soho in Beijing has been leased since it was launched early this year.

Chairman Pan Shiyi warned, however, of headwinds.

We see land Offices at Galaxy Soho are about 60 per cent occupied. Photo: AP prices trending up, further squeezing yield on properties
PAN SHIYI, SOHO CHINA CHAIRMAN

"We see land prices trending up, further squeezing yield on properties since early this year. These high asset prices are not sustainable without enormous rental growth," he said. "In the current market environment, there is no clear indication of economic revitalisation or expectation of strong rental growth."

But Pan said the government would likely release clear economic policies in the next few months. He said Soho would take a prudent attitude to future acquisitions.

Office rents in Beijing fell 1.6 per cent in the second quarter on weak demand after a sharp increase last year, a Jones Lang LaSalle report shows. Rents in Shanghai's Puxi district stayed flat, while Pudong rents rose 1.3 per cent.

The agency said leasing activity in the office market from multinational corporations was slow in the second quarter. It expected tenants to remain cautious about expanding in Beijing but said low vacancy rates would prevent rentals from free-falling. Office rents in Shanghai would stay flat or rise slightly, it said.

Alan Jin, an analyst at Mizuho Securities, said: "Soho China will release plenty of new office supply in the two cities in coming years. It will be a challenge for the firm to attract tenants and lease the space at a good rental rate.

"But Franshion Properties is still able to enjoy positive rental revision, as the existing rents of the leases signed in recent years are still lower than market rents."

Franshion has grade-A office buildings in prime locations in the two cities. It said rents continued to rise in the first half.

The firm's interim net profit jumped 39 per cent to HK$2.23 billion, while revenue soared 208 per cent to HK$11.13 billion.

Stripping out property revaluation gains, the firm said core profit also rose 208 per cent, to HK$1.83 billion.

Shares in Soho China edged up 0.31 per cent to close at HK$6.42 yesterday, while Franshion rose 2.21 per cent to HK$2.77. The Hang Seng Index fell 2.2 per cent.