Guangzhou R&F sells London’s Vauxhall Square at 42 per cent discount to valuation, posting an ‘unheard of’ loss in desperate move to pare debt

The Vauxhall Square parcel in Vauxhall has been sold for £95.7 million (US$124.8 million), at a discount of about 42 per cent to market valuation, R&F said
R&F will incur a £68.8-million loss from its Vauxhall Square disposal, the company said.

International Property

Sandy Li

Published: 3:46pm, 15 Mar 2022

Why you can trust SCMP

Guangzhou R&F Properties has agreed to sell a plot of mixed-use land in London at a loss to Far East Consortium International, in a move that underscores its haste to raise cash to pare its debts.

The Vauxhall Square parcel in Vauxhall has been sold for £95.7 million (US$124.8 million), at a discount of about 42 per cent to market valuation, R&F said in a statement to the Hong Kong stock exchange. The parcel, which can yield 133,000 square metres (1.43 million square feet) of gross floor space, is designated for residential, hotel and hostel, office, retail and leisure developments, R&F said.

The sale is “one of the biggest losses I have ever heard,” which is surprising because “London’s property, particular those for commercial use, are [highly] sought after by investors as there is limited supply in prime areas,” said Martin Wong, director of research and consultancy for Greater China at Knight Frank.

The desperate sale underscores how China’s biggest debtors are stripping assets to reduce their gearing, as 2022 promises to be another record year for debt defaults, particularly among the highly leveraged property developers. R&F has 331.8 billion yuan (US$52 billion) of total liabilities, compared with 270 billion yuan of saleable resources and a nationwide pipeline of properties to be launched, according to its 2021 interim report.

R&F will sell Vauxhall Square for a nominal £1, transferring £95.7 million of its intercompany debt to Far East, according to the terms of their agreement. R&F has a six-month option to repurchase the project from Far East for £106.6 million, according to the terms.

R&F will incur a loss of £68.8 million from its disposal, the company said. The loss drew a sharp contrast with CK Asset Holdings, one of the two flagship companies of Hong Kong’s richest man Li Ka-shing, affectionately dubbed “Superman” for his deal-making prowess. CK Asset last week sold a prime office block at 5 Broadgate in London, where the London office of the Swiss bank UBS is located, for £1.2 billion, reporting a profit of £108 million since its 2018 purchase.

An undated concept of Guangzhou R&F’s Vauxhall Square development in London. Photo: Allies & Morrison.

The disposal by the Guangzhou-based R&F may be an “individual” case that doesn’t reflect the overall market condition, since mainland Chinese developers are facing mounting pressure to reduce their debt under the government’s “three red lines” debt limits, Wong said.

Vauxhall Square lies on the southern banks of the River Thames, not far from MI5’s iconic headquarters building. An early proposal showed two tower blocks of 49-storeys each, according to information compiled by the skyscraper.com website. Construction has not commenced on the site, R&F said in its statement.

“The disposal is beneficial to the group in optimising the allocation of resources, increasing its capital reserve and reducing its gearing ratio, which is conducive to its ability to reduce risks and achieve long-term stable and healthy development,” R&F’s chairman Li Sze Lim said in the company’s statement.

China’s 100 largest property developers sold 40 per cent fewer homes in January and February. R&F’s property sales plunged 55 per cent to 9.11 billion yuan during the two months.

A man dressed as Santa Claus poses on a pod of the London Eye to mark the start of the festive season on 9 December 2020. Photo: PA Wire/dpa

R&F continues to face liquidity challenges as a large amount of short-term debt matures in 2022, while its access to funding could remain limited, Fitch Ratings said. Chinese developers face US$33 billion of offshore capital-market maturities and 150 billion yuan of onshore capital-market maturities from March to December this year, according to the credit rating agency.

“The company is planning asset sales to refinance the upcoming maturities, but we believe there is high execution risk due to the challenging macroeconomic environment,” said Fitch.

The company sold 30 per cent of the Guangzhou International Airport R&F Integrated Logistics Park for 7.3 billion yuan last December to shore up its cash flow and cut debt.

If last year was bad for Evergrande, Kaisa and Fantasia, just wait for 2022

R&F is not the sole developer offering fire sales. Soho China offered to dispose of 32,000 square metres of its property portfolios in Shanghai and Beijing at a 30 per cent discount, East Money Information reported last week, citing chairman Pan Shiyi in a presentation to investors.

“All the proceeds will be used to cut debt,” Pan said, according to the financial news portal. To speed up the sales, Soho China offered to increase the sales commission to 4 per cent of the transaction value, he added.

Soho China had 18.5 billion yuan of total debt as of June 30, including 1.2 billion yuan due within 12 months and another 1.6 billion yuan by June 2023. Its net gearing ratio stood at 43 per cent.