HNA’s fire sale showcases bargain opportunities for CRE investors

Recent asset dispositions by the embattled Chinese group indicates room for more discount buying opportunities, especially for opportunistic investors.

Continuing asset sales by Hainan Airlines Group, the Haikou-based aviation-to-financial services conglomerate and once one of China’s most-acquisitive cross-border investors, could potentially create more discount-buying opportunities for opportunistic real estate managers looking to deploy capital in a late-cycle market.

This week, HNA confirmed to PERE it had sold a majority stake in the office asset 850 Third Avenue in Manhattan, New York to Jacob Chetrit, co-owner of the New York-based real estate firm Chetrit Group, and his two sons earlier this month. The firm did not disclose the sale price but according to media reports, the 21-story, 617,000 square feet building was sold for $422 million. The sale happened two and a half years after HNA acquired the asset in a $463 million transaction, indicating a sales price 8.9 percent lower than the purchase price.

This sale was preceded by HNA selling off a group of real estate assets in Hong Kong in December, after discounting its initial HK$350 million ($44.6 million; €39.2 million) asking price by 26 percent, according to reports.

Over the past 12 months, HNA has ramped up asset sales, including shedding its real estate portfolio, as it the embattled conglomerate looks to raise cash and manage its debt obligations. According to the annual report released in April 2018, HNA’s total debt touched around 598 billion yuan ($94 billion; €79 billion) by end-2017, up 21 percent year-on-year.

“The ambition is to raise at least $100 billion for the whole company,” said an advisor who is familiar with HNA’s business strategy. “They are hoping to sell down all of their business except Hainan Airlines, their core business.”

This strategy shift was confirmed to PERE by an HNA spokesperson who said that the group is “refocusing its strategy around its core aviation-related assets to improve operations and strengthen its balance sheet.”

As much as $6.2 billion in global real estate assets were sold by the Chinese conglomerate in 2018 alone, according to data provided by Real Capital Analytics.

And the New York building and the Hong Kong portfolio may not be the only assets HNA is prompted to sell at a loss. Industry observers tell PERE the market is anticipating the pricing of other assets coming on the market, especially ones within China, to be “flexible”, indicating room for potential discounts.

“HNA hopes to raise as much as $11 billion via real estate sales in 2019, and future discounts probably won’t get smaller,” said Brock Silvers, managing director at the Shanghai-based China investment advisory Kaiyuan Capital that specializes in investments in companies based in China.

Another real estate executive advising foreign investors eyeing some HNA-owned assets being marketed in China said there is a visible difference in price expectations between HNA and potential buyers, especially for assets being pooled together for portfolio sales.

“If you are selling something on a portfolio basis rather than individually, certain assets might be trading at a substantial discount,” the advisor said. “I think the international investment community – people interested in buying these assets –are not willing to overpay.”

According to Sam Xie, head of China research, at real estate services firm CBRE, lending for investment and speculative purchases in China remains highly dampened amid the government’s continuing crackdown on over-indebted private firms. As a result, landlords are more willing to dispose their non-core assets, either to recycle capital for future investment or to lower their gearing ratio.

“Landlords, who may have financial needs, have adopted a more flexible price stance than before,” he said. “They are more willing to negotiate the pricing with potential buyers. However, we have not seen any significant discounted assets disposals yet.”

Global investors will expectedly welcome the opportunity to acquire assets with a potential discount in China but industry observers believe return expectations from these investments will still remain in high teens due to the so-called ‘China premium’. This is because challenges around currency repatriation amid continuing currency controls add a higher degree of complexity and risk while investing in the country, as compared to other markets in the region.