Brookfield to make biggest real estate purchase in China

The Toronto-based private markets giant intends to drive returns through active operational management.

Shanghai

Brookfield Asset Management is purchasing a RMB13.9 billion ($2.1billion; €1.8 billion) mixed-use complex in Shanghai from Chinese developer Greenland, according to a stock exchange filing. Upon the completion of the deal, it will be the firm’s biggest real estate investment in China.

PERE has learned that the asset is being acquired on a fully vacant basis and the capital for the investment has come from the firm’s Brookfield Strategic Real Estate Partners III, which was closed on $15 billion earlier this year.

Brookfield is buying three office towers and a lifestyle retail mall at Greenland Huangpu Centre (GHC) totaling an area of 166.3 million square feet. Located in the South Bund in Shanghai, the property’s pricing was RMB10.6 billion but came with additional construction costs of RMB3.3 billion, according to the filing.

According to real estate brokerage firm JLL’s China research, the average cap rates of grade A office buildings in the central business district area in Shanghai and the cap rates of shopping malls in Shanghai are around 3.8 percent and 4.4 percent, respectively.

Although there is a higher inherent leasing risk involved in purchasing a fully vacant mix-use asset, one real estate capital market source thought Brookfield should be able to manage the leasing as the area is an emerging business cluster.

“If you have no leasing risk, then you will pay a higher price,” said the capital market source. “I believe opportunistic investors like Brookfield have longer term horizons and they look at the potential of the development.”

The complex is due for completion in Q2 in 2019. The firm expects office occupancy in October 2019 and the retail mall to be opened in mid-2020, according to Brookfield, which

declined to comment on the final acquisition price nor the initial yield.

“We invest on a value basis and drive returns through our active operational management,” said Stuart Mercier, senior vice president and head of China real estate at Brookfield. He told PERE that Brookfield will underwrite the risk in the transaction by bringing its operations expertise, place-making activation and global tenant relationships into GHC.

Asset management capability is particularly important when a retail element is involved in an asset in China, according to a senior executive at one Chinese private equity real estate firm. He pointed out that managing a retail mall in China requires very niche experience and local knowledge, particularly with the growth of e-commerce to contend with.

“There aren’t that many available asset managers in the market to do that,” said the executive. “You need to build the experience and to understand the local culture.”

Mercier believes Brookfield’s large global retail portfolio and experience will give it an edge in China. Last year, the firm added two malls in Shanghai into their global portfolio -The Mall Jinqiao and The Mall Nanxiang. Those acqusitions gave the firm the local team and experience to run the lifestyle mall in GHC.

More notable, the firm acquired Xintiandi in Shanghai in 2013 for $750 million. That development, originally by developer Shui On Land, has subsequently been syndicated to Brookfield’s investors.

“We own and manage high-quality retail shopping centers around the word that serve as more than just places to shop, but also as entertainment destinations,” said Mercier. He thinks a successful retail asset should be integrated into their surrounding communities and provide experiential offerings that are not easily replicated online.

Brookfield’s assets under management in China as of April 2019 is $2.4 billion. The firm’s retail portfolio comprises 170 properties globally after it acquired the second largest mall owner GGP in the US in 2018.