China property

Why property renewal is such a profitable business in China’s big cities

  • About 100 million square metres of commercial property in top cities has become outdated and in need of renovation
PUBLISHED : Wednesday, 19 December, 2018, 4:26pm
UPDATED : Wednesday, 19 December, 2018, 4:26pm

The sale of Pacific Century Place, the biggest commercial property deal in Beijing this year, showed just how profitable the business of retrofitting old buildings in China’s major cities can be.

Just over four years after acquiring the 170,000-square metre office-retail-apartment complex from Hong Kong tycoon Richard Li for 5.8 billion yuan (US$939 million), Gaw Capital Partners recently sold it to a Chinese company for 10.5 billion yuan – a rise of 81 per cent.

Instead of adopting the “buy low and sell high” strategy of most passive financial investors, Gaw transformed the 75,000 square metre, old-fashioned retail space into a brand new office with new tenants. It broke down the original monolithic podium to create eight “mini blocks” of retail and lifestyle workspace, and redeveloped the main entrance into a new glass matchbox design.

Gaw Capital ready to sell Beijing complex, sources say, in what would be the biggest property deal in China’s capital city this year

The Gaw story is part of a much larger drive to renew outdated properties in core areas of China’s most developed cities, or in the words of Humbert Pang, head of China at Gaw Capital, to “generate demand by improving supply”.

“The key is to improve efficiency. If you have many buildings in the central area not fully occupied, while you keep building new towers in city outskirt, that’s inefficient. We are transforming the under-utilised parts into the most useful space,” he said.

There will be 180 million square metres of finished commercial properties spread across 20 major Chinese cities by the end of this year, according to Savills China. GoHigh Capital, a specialist fund in the field, estimates that about 100 million square metres has become outdated and in need of fixing.

“Why was there not much talk of property renewal three years ago? Because there was enough new land then. But now it is so difficult to find new development opportunities in prime locations,” said Wang Yutao, president of ZRiver Capital, a real estate private equity firm, which is known for converting a rundown department store in Beijing into an office tower, home to Volkswagen among other tenants.

In Beijing and Shanghai many old department stores and hotels are underperforming, while office space is in short supply. That explains why most conversion projects lead to the creation of offices, after which the rent can often be doubled.

However making profit is not a slam dunk, according to investors and experts.

Nicky Zhu, director of Savills Shanghai Strategic Advisory Services, said the two main challenges are the repositioning of the project, and maximising the increase in rent after conversion.

“It’s not like you build a new office and people will just move in. You have to know local demand very well,” she said.

Pang said location is critically important as rent won’t necessarily increase much for projects in non-core area. Landlords should also identify demand. “Untraditional workspace is increasingly popular. Many tenants now demand stylish decor, their own escalator and signage.”

Cheng Bin, president of Shanghai Charmrich Equity Investment Fund Management, said another challenge is cost control, which requires a lot of execution capability. For example, in many cases investors have to renovate the building without clearing out the current tenants, while at the same time looking for suitable new tenants.

His own fund had transformed a crumbling hotel in North Bund, an emerging business district in Shanghai, into a new office that features a glass facade and arty open space. It was enough to attract technology start-ups as the new tenants, which helped to lift the rent from 2 yuan per square metre per day to 5-6 yuan.