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Banking & finance
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Will collapse of Blackstone’s Soho China deal foreshadow caution by foreign investors in future real estate tie-ups?

  • Blackstone bid to buy developer fell through last week as foreign deals face greater scrutiny in Beijing
  • Soho China’s valuation has dropped since deal was announced in June as China’s real estate sector faces challenges of its own

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The atrium at Leeza Soho in Beijing. Photo: Simon Song
Chad Bray,Pearl LiuandPeggy Sito
The collapse of Blackstone Group’s US$3.06 billion deal for Soho China, known for the Leeza Soho and other office buildings that give Beijing its futuristic skyline, comes at a fraught time for China’s real estate industry and could raise questions about how attractive the sector remains for foreign investment, particularly as China places greater scrutiny on foreign deals, according to market observers.
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Commercial rents dropped by 1.5 per cent in Beijing in the first half of the year and are expected to drop by another 3 per cent by the end of this year – all whilst China’s economy grew by 12.7 per cent in the first six months of 2021. Vacancy rates in the Chinese capital also are expected to rise further later this year, topping 17 per cent by the fourth quarter.
At the same time, Chinese regulators are taking a harder line on foreign listings by mainland firms as part of a recent regulatory crackdown, which has unnerved foreign investors and could further depress cross-border deals. Domestic transactions have been a major driver of activity this year as the coronavirus pandemic and heightened US-China tensions in recent years have eaten into cross-border transactions.

“The real estate market has changed totally in the past couple of months and it is possible that Blackstone is not happy with the price and believes it is better to wait and see to buy properties at lower prices,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai. “Blackstone’s practice is not to hold and operate the asset, but to take over the asset at a lower price and sell high. It would become a hot potato, if it stepped in at the wrong time.”

08:07

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Commercial rents in Beijing, which is home to 18 Soho projects, declined from 330 yuan (US$51) per square metre in the fourth quarter last year to 325 yuan per square metre in the second quarter this year, according to Knight Frank. Rents are expected to decline further to 315 yuan per square metre by this year’s fourth quarter and vacancy are likely to remain above 15 per cent until 2023, making it hard to raise rents, according to the real estate consultancy.

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