Shanghai project occupancy may pave way for New World’s next securitisation exercise, analysts say

Analysts say New World Development’s Shanghai K11 Elysea office project reaching an occupancy rate of about 80 per cent may pave the way for the indebted group’s next securitisation exercise. Analysts add that the project is expected to exceed 100 million yuan (US$15 million) in annual net operating income once the entire project—including the retail space—is fully leased and officially opened.

New World Development stated on Tuesday that new tenants, including luxury brands Hermes and Rolex, are preparing to move into the project’s office component on Huaihai Middle Road. Other tenants, including DBS Bank, Southeast Asian law firm Rajah & Tann Singapore LLP, and global professional services firm Marsh, began occupying offices in October.

Ravi Wong Wai-ho, a securities industry specialist with more than 10 years of experience in Hong Kong stocks analysis, stated that the leasing progress would help ease the developer’s debt-reduction pressure while accelerating cash-flow recovery. "This is undoubtedly a positive direction," Wong said.

Wong, who previously served as executive director of research at China Vered Securities and is currently the first vice-president at Yan Yun Family Office (Hong Kong), noted that the current average rent for the office is over 7 yuan per square metre per day. Based on the gross floor area and the 80 per cent occupancy rate, he estimated the current net operating income at 40 million yuan to 50 million yuan.

Wong added that if occupancy rose to around 90 per cent next year, net operating income could increase to between 70 million yuan and 80 million yuan. He stated that since that figure currently relates only to the office component, the net operating income is expected to exceed 100 million yuan once the entire project—including the retail space—is fully leased and officially opened.

Wong suggested that an occupancy rate of 80 per cent, combined with a portion of the space under long-term leases, would effectively satisfy the requirements for securitisation through a real estate investment trust (Reit). He noted that the group "may wait until occupancy rises above 90 per cent or until the entire project is fully operational," or "it is also possible to bring in investors," stating that "both options are viable."

In September, New World Development announced plans to spin off its Shanghai K11 Art Mall and Shanghai K11 Atelier NWT mixed-use tower into a Reit, known as NWD C-REIT, for a listing on the Shanghai Stock Exchange with an expected offering size of about 3.8 billion yuan. The group said at the time that further financialisation of these assets would be an important part of its strategy to recycle capital, improve liquidity and reduce debt.

Peter Sheng, senior director of office services at property consultancy Savills Shanghai, said K11 Elysea offered a rare office-upgrade opportunity for tenants in the area. He stated that the presence of Hermes and Rolex serves as a powerful brand endorsement and that the arrival of ultra-luxury brands is "undoubtedly a significant advantage."

According to New World, the office’s tenant base spans financial institutions, law firms, consulting firms and luxury retail brands. Sheng noted that K11 Elysea’s asking rents were about 50 per cent higher than those at Hong Kong Plaza or Shanghai Plaza, but remained about 30 per cent below peak levels seen on Huaihai Road.

During the National Day “golden week,” the group reported that multiple K11 projects in mainland China posted encouraging footfall and sales results, with Shenzhen K11 Ecoast, Wuhan K11 and Guangzhou K11 all recording double-digit year-on-year sales growth.