China Insurer Buys Tower

 Published: 3/16/2011 12:22:05 PM GMT
WSJ Original Cached

In the most-expensive single-property sale in mainland China this year, a Hong Kong-based distressed seller is getting a helping hand from the rise in the Chinese currency.

Asia Pacific Land, a private real-estate investment firm with about $4.3 billion in assets, is selling a top-tier office tower in Shanghai to a Chinese insurer for about 4.4 billion yuan ($670 million), according to people familiar with the matter. That would be a loss for the firm, considering the 4.9 billion yuan it paid for the 40-story building in the summer of 2008.

But the deal is turning out to be break-even for Asia Pacific, thanks to the slow but gradual appreciation of China's currency in the past three years, these people said. The buyer, China Pacific Insurance Group, a big insurer in the country, has received approvals from China's currency watchdog as well as insurance regulators to proceed with the deal by converting yuan into dollars.

The transaction is being conducted offshore in dollars, as the seller is a Hong Kong-based entity. The yuan, also known as renminbi, has strengthened about 10% against the dollar since 2008. Beijing, which controls the value of yuan, has been allowing the currency to rise in value in light of growing pressures from the U.S. and other Group of 20 countries that have blamed an unfairly valued yuan for exacerbating their trade deficits with China.

The Chinese government also is letting the yuan appreciate as part of its broader push to make it an international currency that can be used for cross-border trade and investment. However, many in the West have criticized the pace of yuan appreciation as too slow. Some U.S. officials have been trying to persuade Beijing to speed it up by positioning the exchange rate as an inflation-fighting mechanism. A more-valuable yuan makes imports cheaper for Chinese consumers.

Now, the yuan's appreciation certainly is good news for foreign investors who need to cash out their investments in China. In the case of Asia Pacific, the firm was forced to sell the building, called the Center, after it ran into trouble last year refinancing part of the debt on the property. The transaction is expected to close by the end of this week, the people with knowledge of the issue said.

"The decision to purchase the building has long been made by the board of directors, and Pacific Insurance is buying the building to make it our own office building," a spokeswoman at China Pacific Insurance said. A spokesman at Asia Pacific Land declined to comment.

The deal also marks one of the first property purchases by a Chinese insurer since Beijing granted greater leeway last year for the country's insurance companies to invest in real estate. The move was designed to help the country's cash-rich insurers seek higher returns by investing in a wider array of asset classes.

Asia Pacific's purchase of the 98,300-square-meter (about 1,000,000-square-feet) tower in 2008 resembles scores of heavily indebted property deals in the U.S. that have brought down many developers and investors since the downturn but opened the doors for others to sweep in. The property was developed in 2004 by Hutchison Whampoa Ltd., a Hong Kong company controlled by billionaire Li Ka-shing.

The firm financed the 4.4-billion-yuan deal with 90% debt, which was provided by lenders including Germany's Aareal Bank AG, J.P. Morgan Chase & Co. and D.E. Shaw & Co., a prominent U.S. hedge-fund firm best known for its computer-driven investing business. Last year, Asia Pacific was left with little choice but to look for a buyer for the property amid difficulties refinancing part of the debt coming due, the people familiar with the matter said.

The sale process was led by D.E. Shaw, the people said. A spokesman for the firm declined to comment.

However, the timing didn't work in Asia Pacific's favor. Property transactions in mainland China have plummeted in the past year in the face of the government's efforts to cool down the country's real-estate markets. Total sales volume in Shanghai, for instance, totaled $3.9 billion last year, a 22% drop from 2009, according to property-research firm Real Capital Analytics.

But Asia Pacific still expects to get all its money back, largely because of the yuan's appreciation, the people said.

Write to Lingling Wei at [email protected]

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