Everyone loves a fairy tale with a happy ending, and after years of uncertainty, a large-scale, mixed-use property in Beijing is finally set to see one.
The sale, potentially this fall, of Pacific Century Place would vindicate Hong Kong-based private equity real estate firm Gaw Capital Partners, which made a broadly derided bet on what was seen as an ugly duckling property in 2014.
In April that year, Gaw bought the property from Chinese billionaire Richard Li for $928 million – a record price for a single-asset purchase by a foreign real estate buyer in China. The buy was made with co-investors, understood to include the Zug, Switzerland-based private investment firm Partners Group.
PCP, originally completed in 1995, commanded a surprising price for a building many industry observers assessed as a bust, as it suffered from low occupancy rates and myriad other downsides. Gaw was also criticized for deploying into the deal half of its fourth opportunistic real estate fund, Gateway Real Estate Fund IV, for which it raised $1 billion with a final closing in October 2013.
But in the years since, PCP has undergone a complete transformation, including 600 million yuan ($96 million; €91 million) of renovations. As the “operating partner” in the investment, Gaw sought to add value through re-tenanting and reconfiguring much of the asset’s retail and residential components.
Playing to strengths
PCP’s unique selling point, even as an ugly duckling, is its prime location. In Beijing’s Sanlitun neighborhood, the property rubs shoulders with corporate high-rises, embassies and luxury hotels in one of the city’s most popular shopping and entertainment destinations.
Gaw has focused on playing to the building’s strengths and overcoming its weaknesses. When purchased in 2014, its two office towers were over 90 percent occupied, but its twin serviced apartment towers had less than half of their 318 units let. So the relatively large apartments were replaced with more, and smaller, units to cater to growing demand from expatriates and young professionals.
Below the four towers, the central six-story retail podium – primarily consisting of department stores – required the most attention, as it was less than 13 percent occupied when Gaw took over. Such a dearth of occupants had observers suggesting that if not for the occupied office towers, PCP was primed for a wrecking ball reboot. So, in what was the biggest overhaul of the property, the lion’s share of the retail space was converted to offices.
An administrator at the manufacturer Danfoss Group – which has been an office tenant at PCP since 2011 – tells PERE that Gaw’s renovations significantly upgraded the tenant experience, giving the complex a more modern feel in both the exterior appearance and interior layout. She also highlights better common facilities, with a new fitness center and indoor street with restaurants so employees no longer need to leave the property for lunch.
After four years of major repositioning, PCP is expected to change hands again – this time for $1.6 billion, according to the Financial Times. A spokeswoman for Gaw declined to comment on the specifics of the ongoing deal, but a more vocal response is likely should such a home run be crystalized. Such a deal would mean that PCP will sell this time not as an ugly duckling, but as a fully-fledged swan.