ARA has made its second investment in mainland China retail

ARA Asset Management has made its second investment in mainland China retail in just over six months with the joint acquisition of a shopping mall in Shanghai, as the property investment specialist bets on the country’s growing middle-income group to drive consumption.

The Warburg Pincus-backed fund manager is joining forces, through one of its existing private real estate vehicles, with Singapore’s Straits Real Estate and ICBC International Holdings to jointly acquire the Sanlin InCity Mall for RMB 2.42 billion ($350 million), according to a stock exchange announcement.

“Sanlin InCity presents a great opportunity for ARA to showcase our strong investor-operator track record,” said David Kim, acting CEO of ARA Private Funds.

The consortium is buying the ten-year-old mall from a joint venture between China Vanke’s development platform SCPG and Shenzhen Cinve Real Estate (深圳市信城不动产有限公司), which acquired the mall two years ago and re-opened it last year after a complete overhaul, according to a local media account.

Remaining Bullish on Retail

Under the terms of the agreement, Straits Trading-controlled Straits Real Estate is taking a 37.7 percent stake in Sanlin InCity, while the ARA-managed fund and ICBCI are sharing the remaining 62.3 percent.

ARA’s David Kim is confident that the mall will see some positive rental reversion

The shopping centre in the Sanlin neighbourhood of Shanghai’s Pudong district is located around 600 metres south of the Sanlin East station on Shanghai’s metro line 11. The Sanlin InCity caters to mainly middle- to high-income families living in the rapidly developing area just east of Shanghai’s former World Expo site on the banks of the Huangpu river.

Based on Sanlin InCity’s gross floor area of 894,201 square feet, the joint venture is paying RMB 2,706 per square foot for the property.

Straits Trading, which has diversified into property and hotel investment in the more than 130 years since it was founded as a tin-smelting business, also owns a 21 percent interest in ARA Asset Management.

Capitalising on Rental Upside

Sanlin InCity re-opened during the fourth quarter of last year and the community centre is currently 91.3 percent occupied, according to ARA’s statement.

According to ARA, the project is the only competitive mall in the area with no new retail supply planned within a three-kilometre radius over the next three years.

With the mall nearing the end of its first lease cycle, the joint venture partners are planning to capitalise on future increases in leasing rates, according to the statement. The new owners also see potential for upgrading the tenant mix in the retail centre, which could also boost revenues.

“We have studied the property and are ready to execute our asset enhancement and repositioning plans upon completion of the deal,” said Kim, adding that he was confident that the upgrades would add value for the benefit of investors as well as the Sanlin community.

Betting on the Future of Experiential Retail

“ARA’s investments in The Atrium in Chengdu and Sanlin InCity in Shanghai this year demonstrate our positive outlook on commercial real estate in China,” said Kim.

The acquisition comes just over a half year after ARA teamed up with CICC Capital to buy a Chengdu retail property from a Tishman Speyer-managed fund, and, despite the growing threat of e-commerce, ARA is bullish on the potential of retail in mainland China.

“With effective management, retail malls can provide a real life experiential interaction that will attract shoppers and families,” Kim said. The ARA executive added that the potential for retail centres in mainland China is being driven by the growth of the country’s middle-income earners and the shift to experiential retail.

The joint acquisition gives an additional boost to the firm’s mainland China portfolio following the joint acquisition of the Atrium mall in Chengdu in May this year.

For that acquisition, ARA raised RMB 400 million for its first ever renminbi denominated fund – ARA Qihang Equity Investment – to co-invest with a matching RMB 400 million vehicle managed by CICC Capital, the private equity arm of China’s largest investment bank.

Coupled with additional debt financing, the partners said at the time that they expected to invest a total of RMB 1.6 billion in the 45,352 square metre property, which they bought from a Tishman Speyer-managed fund.

The Sanlin InCity joint acquisition brings ARA’s portfolio in mainland China to 11 assets across office, retail and hospitality, with a combined value of RMB 76.7 billion as at 30 September 2019.