Soho China sees coronavirus weighing on revenue after office occupancy, rents fall amid slowing economy

Pearl Liu

Soho China, which is in talks with Blackstone over a US$4 billion privatisation deal, said its slowing office rental income will come under further pressure as the coronavirus outbreak weighs on China’s economy, after it reported a 31 per cent decline in annual profit.

The Hong Kong-listed developer, known for its futuristic curvilinear office buildings in China, posted a core net profit of 1.33 billion yuan (US$188 million) for 2019 on revenues of 1.85 billion yuan, according to an exchange filing on Wednesday.

The company cited the 2018 disposal of Sky Soho, a set of grade A commercial buildings in Shanghai, as the main reason for the drop in profit last year. It had made a net gain of 987 million yuan on the sale.

Rental income, which contributes over 99 per cent to its overall revenue, grew 5.6 per cent year on year in 2019, much slower than the 18 per cent jump in 2018 and 11 per cent in 2017.

Soho China, builder of Zaha Hadid’s curves, is in talks with Blackstone in US$4 billion privatisation deal

Chairman Pan Shiyi said in a statement accompanying the results that average office rent and occupancy rates in Beijing and Shanghai decreased throughout 2019, dropping to around 90 per cent in the fourth quarter.

The coronavirus outbreak is expected to worsen China’s office market situation as the pandemic weighs on the country’s economic growth. On Monday, high-profile brokerage China International Capital Corporation sharply cut its real GDP growth forecast for 2020 to a record low of 2.6 per cent, from 6.1 per cent in January. Many in China are now bracing for the second wave of economic fallout from the pandemic, which crippled activity in the first two months of the year.

Soho China chairman Pan Shiyi. Photo: Handout

Beijing will see average office rents drop 5.9 per cent to 360 yuan per square metre per month in 2020 with vacancy rate rising to 18.4 per cent, up from 13.5 per cent in 2019, according to Cushman & Wakefield. Rents in Shanghai will see a smaller drop of 1.4 per cent to 250 yuan per sq metre per month but the vacancy rate will be higher at 22.9 per cent, the consultancy said.

“Office buildings with a high percentage of SME tenants in their occupier mix might experience spikes in vacancy, given a good number of these companies were hit hard by the compression in business activity and we may see many office relocation and expansion cases being paused or pushed back due to a wait-and-see business attitude adopted by many companies,” said Shaun Brodie, senior director for Greater China at Cushman & Wakefield.

Soho China has been trying to sell its assets since last year, offering eight office towers in Beijing and Shanghai for as much as US$8 billion, according to a Bloomberg report.

“Soho’s investment property is too large and too focused now – most are office properties,” Pan said when he announced his sale plan. “Our property’s return is 3 per cent, falling short of bank loan cost which stands at 4 per cent.”

Earlier this month Reuters reported that US private equity group Blackstone will pay HK$6 per share, almost double Soho China’s average price of HK$3.03 in January, to take the company private. However, the company has not yet decided if it plans to proceed with the deal.

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