Bloomberg News

Soho China Is Turning to Rental to Reverse 65% Profit Drop

August 16, 2012

Soho China Ltd. (410), the Beijing-based commercial developer whose profit dropped 65 percent, said it will hold on to more of its properties as office rents in Beijing and Shanghai rise.

Investment properties will bring in almost 4 billion yuan ($628 million) of annual rental income in three years, Zhang Xin, chief executive officer of the Hong Kong-listed company, which has traditionally sold most of its projects, said yesterday in a Bloomberg TV interview. Soho China took in 76 million yuan in rental income in the first half, while income from sales of properties was 1.15 billion yuan.

“For build and hold, there will not be many surprises because you’re holding the buildings for lease,” Zhang said. “The leasing market is more stable than the sales market. When we do build and sell, the capital market doesn’t always understand.”

Beijing’s average prime-office rent rose 4.6 percent in the second quarter from three months earlier, with an average yield of 7.4 percent, while in Shanghai it gained 2.1 percent in the period, with a yield of 6.1 percent, according to property broker Knight Frank LLP. Hong Kong, the world’s costliest place to rent office space, has an average yield of 3.3 percent, the broker said.

China has been expanding efforts to control the property market and sent teams to provinces to check on the implementation of curbs that include restrictions on the number of properties people can buy in about 40 cities and higher down- payment requirements.

Holding Properties

Shares of Soho China fell 5.3 percent to HK$5.41 as of 9:53 a.m. Hong Kong time, heading for their biggest decline since Dec. 19. The stock yesterday fell 3.1 percent after earnings were announced. Today’s loss cuts the gain this year to 4.5 percent, compared with the 8.8 percent advance in the benchmark Hang Seng Index. (HSI)

Soho China, the largest developer in Beijing’s central business district, is making a transition to “strategically hold properties” from a “traditional sales model,” the company said in a statement yesterday. It will hold a total of 1.5 million square meter (16 million square feet) of office space in Beijing and Shanghai, Zhang said.

First-half net income fell to 613 million yuan from 1.75 billion yuan after Soho China booked fewer sales of its commercial properties.

“I can say with nearly 100 percent confidence that by the end of the year the earnings will be strong,” Zhang said, adding that she expects a “strong” second half as the developer will complete more pre-sold projects.

Share Buyback

At yesterday’s closing price, Soho China has a price-to- book ratio of 1.12, while China Vanke Co. (000002), the nation’s biggest developer, has a multiple of 1.72. Soho China said in June it plans to buy back as much as $200 million worth of its shares.

“At today’s share price we have every intention to buy back” the company’s shares, Zhang said. “We certainly think the shares are very undervalued.”

China sent eight teams to 16 provinces last month to check on the implementation of its property curbs, and the nationwide check is aimed at “firmly” restraining property speculation and consolidating results of the curbs, the central government said on its website on July 25. Premier Wen Jiabao has said the government will maintain the curbs it began introducing in April 2010 to ensure housing remains affordable.

“The government still has a lot of power to stimulate and relax the credit,” said Zhang. “If they allow the market to move on, there’s still quite a bit of pent up demand out there and its being artificially pushed down.”

To contact Bloomberg News staff for this story: Kelvin Wong in Hong Kong at 6441 or kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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