The Wall Street Journal Asia - Morgan Stanley sells Shanghai tower to SOHO

HONG KONG -- Chinese commercial-property developer SOHO China Ltd. made its first acquisition outside its home base of Beijing, paying about US$360 million to Morgan Stanley Real Estate Fund for a 52-story office and retail tower on the edge of one of Shanghai s main business districts.

Hong Kong-listed SOHO said it would lease the office space in the building or sell it in pieces, starting in September. SOHO will also manage the building, which it is rebranding as The Exchange -- SOHO.

The transaction provides a convenient exit for Morgan Stanley, which purchased the then-unfinished building in August 2006 for about US$245 million, according to property broker DTZ.

The building, one of Shanghai s tallest skyscrapers, has had a complicated legal history since work began on it in the mid-1990s.

SOHO Chairman Pan Shiyi said Tuesday that any legal complications had been taken care of. Mr. Pan said the building was fitted out last year and currently has about 30% of its space leased.

The purchase represents confidence from one of China s highest-profile developers that commercial property in mainland China s main financial hub will bounce back strongly as the economy improves.

Office prices and rental values in Shanghai were hit hard by the global recession, and experts say that conditions in the city, which is faced with a surfeit of supply after a difficult year, are particularly challenging.

In the second quarter of 2009, Shanghai s top-grade office market saw its first quarter-on-quarter increase in vacancy in recent years, hitting 14.1%, according to property brokers Colliers International. At the same time, Colliers said, average rents fell by 9.0% when compared to the first quarter of the year .The timing of the purchase suggests that SOHO sees upside in the current environment. The developer has said for years that it would stick with its focus on the Beijing market it knows best, though executives have said in recent months that they would invest in other markets after careful consideration.

"Although this is our first foray into Shanghai, it certainly won t be our last," Mr. Pan said Tuesday.

Mr. Pan said he still saw commercial property in Shanghai as "undervalued" compared to the residential market, adding that he had little interest in investing in the city s residential property market.

"We want to buy where prices are cheap, rather than chasing rising prices," he said.

Mr. Pan declined to say what prices he hoped to fetch on the market.

For Morgan Stanley, the transaction is a key divestment. The U.S. investment bank s real-estate funds have a large portfolio of commercial and residential properties around Shanghai, much of it accumulated during the property boom that ended in late 2007.

A Morgan Stanley spokesman declined to comment Tuesday.