ZhongAn may be betting on property rebound with Shanghai office buys

The online insurer has agreed to purchase two office buildings in Shanghai’s iconic Bund area amid signs that China’s commercial property market may have hit bottom

Key Takeaways:

• ZhongAn has agreed to buy two office buildings in Shanghai from a joint venture majority-owned by the Rockefeller Group
• China’s property market has been in a prolonged slump, but the commercial segment is showing early signs of recovery

By Warren Yang

ZhongAn Online P & C Insurance Co. Ltd. (6060.HK) is giving China’s real estate market a vote of confidence, at least of sorts.

Last Tuesday, the online insurer announced it had signed a deal to buy two office buildings in the iconic Bund area of Shanghai for about 1.44 billion yuan ($199 million) from a joint venture majority owned by Rockefeller Group, the developer behind Rockefeller Center in New York City. That’s substantial spending for the company, nearly equal to all of its cash holdings at the end of last year.

ZhongAn said it will fund the purchase with internal resources, although more details about its financing plan would be helpful, given that its cash holdings only barely cover the total cost. It said it will pay about 590 million yuan for full ownership of one of the two buildings by next Wednesday and 845 million yuan for the other by May 15 next year.

The substantial expense aside, the move is also interesting due to its timing. China’s property market has been in a prolonged slump that started with the residential segment and spread to the commercial sector. The apartment market has suffered from a supply glut after decades of a policy push by Beijing to make houses available to a new generation of homeowners and drive economic growth.

The commercial property market’s problems are a bit different as the large amount of office space on the market wasn’t a huge issue until the arrival of Covid-19, which heralded an era of working from home. China’s current economic slowdown is making the problem worse, as many businesses are being forced to downsize, move to more affordable office spaces and even close completely.

From ZhongAn’s perspective, it’s important to note the company says it isn’t buying the Shanghai properties as an investment. It said the acquisition is aimed at reducing its own rental costs, which suggests it will use the buildings at least partly to house its own offices, rather than purely for rental income. The deal can also help ZhongAn win local brownie points by contributing to the Shanghai government’s bigger plans to transform the city into a regional fintech hub.

ZhongAn had nearly 2,000 employees at its Shanghai headquarters as of the end of last year, so it does need a lot of office space in the city.

Good bargains

Regardless of its motivations for the purchases, it does seem like ZhongAn thinks the commercial property market may be near a bottom, making now a good time to lock in some bargains. The company said an independent appraiser gave the properties a fair market value of 1.49 billion yuan as of the end of February, higher than the total price it’s paying. In other words, the company believes it is getting the buildings for a discount, albeit a small one.

Such discounts are hardly surprising in the current Chinese property market, and the relatively small mark-down could hint that supply and demand for commercial properties are becoming more balanced. As recently as January, asset management giant BlockRock was trying to sell two office towers in Shanghai at a 30% discount to the 1.2 billion yuan it paid back in 2018, according to a Bloomberg News report.

Also, in 2022, when lockdowns were still common across China, global insurance group AIA bought 90% of an office complex in Shanghai’s North Bund area for significantly less than what Singaporean real estate group CapitaLand paid for a nearby project on a price-per-square-meter basis in 2018.

Now, additional signs are emerging that a commercial property market recovery could be taking shape. For example, rent for prime retail locations in Beijing rose at the fastest pace since 2019 in the first three months of this year. And the number of sales of commercial properties in the city increased at double-digit percentage rates in January and February from a year earlier, even as residential property transactions continued to decline.

This means ZhongAn’s move could be partly pre-emptive, aimed at avoiding having to pay more for rent in the future if the commercial property market slowly emerges from the slump. And, of course, the company certainly won’t complain if the values of the buildings rise, even though its intent in buying them wasn’t for investment purposes.

The risk is that the company could be forced to write down the values of the towers if the nascent rebound turns out to be a false start. Such a development could hit the company’s balance sheet pretty hard, as the amount it’s paying equals more than 80% of its core capital as of the end of March, based on its latest key solvency-related metrics disclosed on the same day when it signed the property deal.

At the same time, the cost savings from lower rental payments could help to boost ZhongAn’s bottom line profit, as it remains tough to boost revenue in China’s current slowing economy with increasing consumer caution. The company lost money in the first quarter, according to its latest solvency report for the three months. It didn’t provide more details about its financial performance, but its failure to turn a profit for the period underscores challenges it’s facing, especially after it posted a profit of about 4.1 billion yuan last year.

ZhongAn shares rose three consecutive days after the property purchase announcement, suggesting investors were cautiously welcoming the step. But the stock has lost more than 45% of its value in the past year, far more than a 9% fall in the Hang Seng Index, to trade at a modest price-to-earnings (P/E) ratio of 4.7, which is less than half of the 9 for Ping An’s (2318.HK; 601318.SH) Hong Kong-listed shares.

Controlling costs can be critical in rejuvenating ZhongAn’s valuation, given the difficulties of growing its revenue in the current climate. That makes the office acquisitions look relatively sensible in more than one way – assuming the commercial property market does indeed start to stabilize soon.

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