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Soho China turns retail space into office shares

Aug. 20th, 2016     Source: FT Chinese

One of China’s leading property tycoons has warned of a grim outlook for retail landlords as overcapacity and the rapid growth of ecommerce hit shopping malls in the world’s second-biggest economy.

Zhang Xin, the chief executive and majority owner of Soho China, said the commercial property developer focused on Beijing and Shanghai had “pretty much converted all of our retail space, with a very few exceptions, to offices”.

“You have some really well run high-end retail that will do well,” she said. “But way too many badly run high-end [malls] that won’t do well. And the low end has been beaten by online, so they are quickly disappearing.”

In the heady days of easy credit and rapid economic growth of the past decade, developers in China rushed to build malls. But many shops and department stores have closed in the past two years as sales have slowed and online commerce has accelerated, exacerbating overcapacity that has left ghost malls across the country.

Ms Zhang said Soho China, which she runs with her husband, was keen to tap into resilient demand for office space.

She cited Soho’s recently completed Guanghualu 2 project in central Beijing, where 30,000 square metres of retail space was converted into shared offices under the 3Q brand the company launched last year.

“We have quite a nice shopping mall we designed but, having realised there was hardly any market, we turned this into our flagship 3Q with 3,300 seats,” she said on Thursday on a trip to Hong Kong to announce half-yearly results.

Ms Zhang, whose company is the biggest developer of offices in China’s top two cities, says the new serviced offices are popular with local and international internet companies such as Uber, Sina and Meituan Dianping that often need extra space at short notice.

Soho China aims to have 16,000 seats across 16 centres this year and plans to expand to cities including Guangzhou, Shenzhen and Hangzhou.

The move is part of a shift from an investment-heavy “build-and-sell” approach to a “build-and-hold” strategy to generate more stable rental income.

Soho China’s revenue jumped by 85 per cent year-on-year to Rmb727m ($110m) in the first half of the year because of an increase in rental income, and profit after tax quadrupled to Rmb595m, boosted by valuation gains.

But she said Soho China was still open to selling some non-core properties, particularly with many cash-rich Chinese insurers willing to pay high prices for assets with good rental yields.

After the sale of one property this year drew bids from many Chinese insurers, she decided to put three more buildings on the market to cash in on their demand for suitable assets.

Investors were initially sceptical about Soho China’s change of model but after slumping last year, its Hong Kong-listed shares are up by 40 per cent.

Analysts at Credit Suisse say the asset sales should “unlock value” and support dividend payments as Soho works to boost its rental income.