Link REIT Buying Remaining 50% of Shanghai Mall from Vanke for $335M

Link REIT plans to make some upgrades to Qibao Vanke Plaza in Shanghai (Image: Link REIT)

One of Asia’s biggest retail landlords has been doing some pre-New Year shopping in China’s discounted property market, with Link REIT announcing on Friday that it has agreed to buy out China Vanke’s stake in a Shanghai mall to take full ownership of the property for RMB 2.4 billion ($335 million).

Asia’s largest REIT by market capitalisation is buying out the Shenzhen-based builder’s 50 percent interest in Qibao Vanke Plaza at a 32.5 percent markdown from the asset’s latest appraised value, according to a stock exchange filing.

Upon completion of the deal, the five-storey property is set to be rebranded and will be managed by Link REIT, with the trust flagging the Minhang district property’s potential to be a flagship mall showcasing Link REIT’s retail capabilities and attracting “new-to-China” retail concepts.

“We are pleased that our joint venture partner Vanke agreed to let us take management control of this sizable and high-quality property which is yield accretive and has long-term growth potential,” said George Hongchoy, chief executive of Link REIT in a release. “Being the property’s co-owner since 2021, Link’s takeover will provide tenants with business continuity and clarity.”

Link REIT, which intends to hold the property as a long-term investment after acquiring its initial half stake from Singapore sovereign fund GIC for RMB 2.8 billion in 2021, is also exploring opportunities to introduce one or more strategic partners to co-invest in the mall either before or after the deal closes.

Buy, Fix, Co-Invest

With the property at the intersection of Caobao Road and Qixin Road currently 94.5 percent occupied, Link REIT pointed to Qibao Vanke Plaza’s rapid rebound from the pandemic, and opportunities to improve returns, as part of its investment rationale.

Link REIT chief executive George Hongchoy

“Since Link’s acquisition of a 50 percent interest in 2021, the Property has proven its competitiveness, and delivered resilient business performance despite the significant challenges during the Covid-19 pandemic period,” Link REIT said in the filing. “Supported by a high quality and well-diversified tenant base, the Property has maintained occupancy of approximately 95 percent during the period of Covid-19 pandemic. A remarkable lease reversionary rate of 11.2 percent was recorded in 2023.”

Leases accounting for more than 85 percent of the 2016-vintage mall’s current passing base rental income of RMB 40.6 million and retail income of RMB 39.4 million each month are set to expire by 2026, with the lease for the car park, which contributes additional income of RMB 1.2 million each month, set to end in December of next year.

With those leases soon concluding, Link REIT’s management is already looking at ways to boost rents and attract potential partners.

“Going forward, we are not only committed to providing mall consumers with pleasant experience and vibrant community life but will also continue to explore different asset strategy options to enhance the value of the property, including introducing like-minded strategic partners,” said Hongchoy.

Link REIT’s agreed price for Qibao Vanke Plaza is an 8.3 percent discount to the property’s “free-from-encumbrances value” of RMB 5.2 billion as agreed by Link REIT and Vanke, with that agreed valuation representing a 26.3 percent discount to the property’s independently appraised value of RMB 7.1 billion as of January.

The mall’s free-from-encumbrances value also represents a 18.8 percent reduction from the RMB 6.4 billion agreed valuation when Link REIT acquired its initial stake in the mall three years ago.

Under terms set in the purchase agreement, Link REIT will share with Vanke a portion of gains from any sales of equity in the asset to third parties as a result of the trust’s introduction of co-investors within the 12 months following the deal’s completion.

Improved Operating Performance

Qibao Vanke Plaza connects directly to Qibao station on Shanghai metro line 9, with that hub set to become an interchange station for the upcoming Hongqiao-Pudong airport connection and Jiamin lines when they commence operation, which is scheduled for late 2024 and 2027, respectively.

With a gross floor area of 148,853 square metres (1.6 million square feet) the mall has net lettable area of 88,882 square metres, and its land use rights are in place through November 2052.

The property had 315 tenants as of January, of which 78.4 percent comprised tenants in the apparel and footwear, food and beverage, and leisure and entertainment sectors.

The mall’s revenue grew 31.3 percent to RMB 503 million in 2023, compared to year-earlier levels with net profit after tax climbing 86.5 percent to RMB 165 million in 2023 over the same interval. Both metrics exceeded their 2021 levels.

The mall attracted 21.5 million visitors in 2023, up 45 percent from 2022 and exceeding the 2021 level by 11 percent, with that total equivalent to eight times the permanent population of Minhang District, according to the release.

Shanghai retail sales grew by 12.6 percent in 2023 from a year earlier to lead China’s first-tier cities, according to government data cited by the REIT’s manager.

The trust will fund the purchase with internal resources and does not expect the transaction to have any material adverse impact on its financial position, with Link REIT projecting that, following completion, its pro-forma adjusted ratio of net debt to total assets will rise to 20.4 percent from 19.3 percent.

The deal will also boost Link REIT’s proportion of mainland China assets to 14.4 percent of its portfolio value from 13.3 percent as of September 2023.

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