The hottest IPO this week… is a commercial real estate developer called SOHO in China. They develop large scale, modern, western-style, stylish, grade A office buildings in China (primarily Beijing). Developers in China will do well as long as there are speculators in the market; and there are plenty. From what I hear from my travels, SOHO did particularly well due to one key factor: the access to cheap land as result of a corrupte/inefficient land allocation process. Apparently this advantage has eroded over time. I suspect the profit margins for future projects will decline considerably.
I also recall walking through one of SOHO’s office complexes in the Cental Business District in Beijing. It is a 20+ tower complex. I commented on the eerie silence whereby my Beijing friend told me that the occupancy rate is terribly low. But that’s not a problem for SOHO, but rather, for the owners who bought the space. Apparently, the supply of AAA buildings much exceed the demand. For property owners though, it’s the capital appreciation that they are looking for. In the game of musical chairs, it’s not going to be pretty when the music stops. Those who timed well though, will make a fortune.
To quote the now (infamous) Chuck Prince, “as long as the music is playing, you’ve got to get up and dance.” Apparently in China, they’re still dancing… The moment of truth won’t come until after 2008 Olympics.
I’m curious as to the extreme low occupancy rate – were those units all sold? Some press reports mention the huge debt on their balance sheet, and I wonder why they didn’t come back to the market sooner after shelving the initial IPO in ‘02.