EUR 850.00 For Business Accounts Only

Morningstar | New Morningstar analyst report for SOHO China

While many Chinese developers aspire to become landlords, and several have assembled large portfolios of investment properties, most still rely on residential trading to generate cash flow to fund ongoing operations and to build out investment properties. Soho China is distinctive in that it is moving to a build-and-hold model.Since its transition from built-to-sell to build-and-hold in 2012, Soho has assembled a portfolio of office assets across the central business districts of Beijing and Shanghai. Although the firm is the largest office landlord in both cities, its market share is small, owing to the fragmented commercial office space markets. With the addition of generally unconstrained land supplies, individual landlords, including Soho, have little pricing power.Office lease rates have risen significantly in recent years. However, given the ample supply pipeline over the next few years and a slowing Chinese economy, we expect a flattening trend in the Beijing market, while Shanghai may see significant downward pressure on rental and occupancy rates.It is in this environment that the company launched 3Q early in 2016, a coworking office space with flexible lease terms and online booking and payment. The company has an aggressive schedule of rolling out 100,000 seats, provisioned through the office buildings it owns or through partnership with other office landlords. 3Q is likely to lease up to half of the company’s floor space. It is expected to generate revenue exceeding that of traditional leases by 2017 or 2018, and account for 25% of the operating profit. The long-term plan is to spin off 3Q as an asset-light stand-alone entity and transition Soho China into an REIT-like asset-holding entity. Given 3Q’s large impact on the company’s revenue and earnings, it alters the company’s risk profile from that of a traditional office landlord. 3Q is expected to account for 40%-50% of the leasable gross floor area of the company’s office portfolio. The performance of 3Q will significantly affect the company's overall profitability. During the initial ramp-up phase, 3Q may incur losses, as it may not generate adequate revenue to cover the lease payment.