Despite the bleak outlook in the mainland real estate market, K Wah International Holdings has teamed up with two public partners in a government land sale to buy a mixed-use site in Shanghai’s Xuhui district for the price reserve of RMB 3.73 billion ($515.8 million).
The group controlled by Hong Kong’s fourth richest man, Lui Che-woo, with his partners is set to build a 195,800 square meter (2.1 million square foot) complex. according to a stock announcement.
The project will combine commercial and residential space in a transit-connected site in the southern tip of Xuhui District, and K-Wah highlighted the importance of this transit connectivity when announcing the deal.
“The acquisition of the land represents an excellent investment opportunity for the group, which is embarking on transit-oriented development to expand its presence in the Shanghai real estate market, replenish the group’s land bank and is in line with the group’s business development strategy and planning,” says the developer.
Betting on an AI cluster
The land is located in Huajing City Development Zone in southern Xuhui District, which aims to develop artificial intelligence and life science industries, and will yield 195,800 square meters of total gross floor area, according to the stock exchange filing.
It is intended for mixed use including residences, offices, retail, restaurants and hotels, the developer said. K Wah’s offer for the site is equivalent to 19,000 RMB per square meter.
The K Wah development will be part of an overall 813,000 square meter mega complex called Huazhimen (Hua Gate) above West Huajing subway station. The area is close to a developing industrial hub known as AI Town and a planned life sciences area called “West Bund Maple Bay”.
The developer will construct 88,875 square meters of office space, 40% of which is to be held long term. The developers will also build up to 50,000 square meters of hotel space and 9,250 square meters of retail, under the terms of the sale of the land.
The development will also include 47,715 square meters of residential space with a price cap of RMB 81,000 per square meter.
The Hong Kong-based company is forming a joint venture with state-backed companies Shanghai Longhua Property Company Limited and Shanghai Huicheng Property Operations and Management Company Limited to develop the site.
The AK Wah subsidiary will hold a 60% stake in the joint venture, and Shanghai Longhua and Shanghai Huicheng will take 35% and 5% respectively.
Single bidder auction
K-Wah and its partners won the auction for the 45,302.87 square meter Xuhui site in late September, with the purchase coming shortly after China’s statistics bureau said sales of unsubsidized housing fell by 27.9% in the first eight months of the year, compared to the same period in 2021.
Despite the negative numbers, James Macdonald, head of Savills Research China, told Mingtiandi that the outlook for China’s real estate sector is positive in some areas.
“The land development market is challenging given much tighter funding from developers and a slowing economy and real estate sector. However, key cities such as Shanghai, Beijing and Shenzhen are still attracting interest given their economic diversity, large talent pools and strong support from well-funded local governments.
The problems facing major Chinese developers such as Evergrande and Sunac also mean that K-Wah and its partners have faced no competition for land with records from the Shanghai Real Estate Exchange Center showing that the K Wah consortium was the only bidder.
The site will connect to the existing West Huajing metro station on line 15 which was launched in early 2021 and two more connections, line 19 and an airport link are under construction.
Shanghai also plans to build another metro line (Line 23) which will interchange with Line 19 just one stop from West Huajing Station.
“Once these lines are officially open, connectivity in and around the site area will be greatly enhanced, which should elevate the site’s TOD credentials. Apart from the construction of a new subway line, the road network to and from the site will also be improved,” Shaun Brodie, senior manager of Cushman & Wakefield Greater China, told Mingtiandi.
“Even though some developers take a conservative stance in land acquisition, plots in central areas of the city and plots close to mature transport hubs, or hubs that have the potential to strengthen their transport links, are always attractive,” added Brodie.
Traditionally known for the Xujiahui Commercial Center and its leafy boulevards, Xuhui’s development has shifted south in recent years as the Chinese government encourages tech companies to locate in Xuhui Binjiang.
Chinese e-commerce company Alibaba has spent 7.5 billion RMB to acquire two plots of land in the region also known as the “West Bund” to house its headquarters in eastern China.
Another big name in the region is SenseTime, a major Chinese artificial intelligence company which in January purchased 23 floors of the AI Tower in Xuhui as its local headquarters.
K-Wah is not the only foreign company to want to invest in the region. Hongkong Land paid a record RMB 31.05 billion ($4.48 billion) for the 1.1 million square meter West Bund Financial Hub project in 2020 and in June spent another $700 million to buy a residential site in the area which will yield 526 housing units.
The average house price in the West Bund or Xuhui Binjiang area is up about 41% from five years ago.
And according to the latest data from JLL, there are signs of recovery in the broader Chinese residential real estate market, which could push these prices even higher.
Pent-up housing demand
The property company says the looser monetary policy of the People’s Bank of China, which lowered the prime lending rate for home sales in August, has unleashed pent-up demand kept in check by Covid restrictions.
JLL said total residential sales volume increased 188.4% from the previous quarter, with a total of 3.7 million square meters changing hands in the previous three months.