Singapore’s ARA Asset Management has made its first retail purchase in China since the covid-19 outbreak amid growing opportunities in the sector.
With capital from its onshore vehicles, ARA has returned to the Chinese retail market. The manager has agreed to acquire a 50 percent stake in Dasin Retail Trust Management and 5 percent of the total shares in Singapore Exchange-listed Dasin Retail Trust. With assets under management of $1.8 billion, the trust has a portfolio of seven retail malls in China’s fast-growing Guangdong-Hong Kong-Macau Greater Bay Area. The trust was trading at an approximately 50 percent discount to net asset value, as of December 2020.
Alvin Loo, head of China at ARA Asset Management, told PERE that the firm has been very confident about the retail market in China and has seen more potential opportunities in the market after the introduction of three red lines policy. The policy limits the leverage levels of developers in China and consequently has put some firms under pressure to offload their commercial assets.
“The asking price has come down by as much as 30 percent in general as the vendors have become more realistic,” said Loo. Between 2018 and 2019, the firm was more conservative about the retail market as it was difficult to find assets at the right price. “We couldn’t achieve a yield-on-cost of 7 to 8 percent in three to four years with the previous price level,” he explained. Loo also added that ARA was better able to negotiate on price because of the current lack of buyers in the sector.
Loo pointed out the Chinese retail market rebounded to pre-covid levels as early as mid-2020. For example, sales and footfall in Shanghai’s Century Link mall plummeted by more than 85 percent when the country went into a full lockdown in February 2020 but have held fairly steady since July 2020, according to data from ARA and Century Link.
Even for deals that closed right before the pandemic, the retail assets are performing “at or close to underwriting,” according to Loo. The firm manages more than $500 million in assets in China’s retail sector, including the Salin InCity Mall in Shanghai and the Atrium Mall in Chengdu.