Treasury warms to blizzards in China

Chinese tradition has it that snow arriving just before the new year is auspicious. China's new year celebrations kick off this weekend and, over the last few days, the country has had more snow than it could have bargained for, followed by power cuts, flight delays and general chaos, writes Barry O'Halloran.

But presumably the fact that it's a harbinger of good fortune can't have been lost on two Irishmen - Treasury Holdings' owners Richard Barrett and John Ronan.

Treasury and its principals are key shareholders in China Real Estate Opportunities (CREO), the Jersey-registered company that they refloated on London's Alternative Investment Market (Aim) last July, raising €380 million to buy properties worth around €900 million.

After a slow start that included delisting a year ago, and subsequently refloating it in July, things are beginning to move up a gear. CREO expects staff numbers to rise to 70 this year, from 30 at the time of its re-entry to the stock exchange, and it is moving ahead with developing its properties, three of which are located in Shanghai, the city where CREO and its management company, Treasury Holdings China, are based. CREO sells itself as a pure play on the Chinese property market, which has been growing rapidly on the back of the country's expansion. The company points out that getting into China is not all that easy, so it makes more sense to invest in a business that's already there.

The company has a point about entry to the market. Getting a foothold there is not easy. The economy is opening up, but the communist government, which still keeps a tight grip, strictly controls the way in which the welcome mat is rolled out to foreigners. For instance, it's only four years since the retailers were allowed to come in and do business on their own. Before that, they had to do it in conjunction with a local partner.

The government issues the licences and permits needed to build or develop anything, and it also has a stake in many of the local construction companies. Consequently, it holds the key to entering or investing in the market.

This partly explains why CREO has had a slow take off. Barrett, who is a director as well as a shareholder, has been living in China for the last few years and has put a lot of effort into building up relationships with the government, even down to attending karaoke sessions with officials. CREO has also built a relationship with Shanghai Industrial Investment Corporation, which is the development arm of the region's municipal government. The pair are working on one joint venture at Tangdao Bay, a resort in Qingdao, the port situated midway between Shanghai and Beijing that will be the location for the Olympic sailing events next August. The group is planning a residential and retail waterfront complex with a marina. The development is likely to have a capital value of €500 million when it is finished.

CREO recently spent €18 million on two sites that will form part of the overall project.

Much of the portfolio's value is in Shanghai, a city whose economy had generated almost €86 billion in the first three-quarters of last year, and whose gross domestic product (GDP) is growing at 13.4 per cent, around 2 per cent faster than the rest of the country.

The biggest property holding is in Hongqiao, a district in the west of the city traditionally favoured by ex-pats and which is set to benefit from government plans to develop a transport hub there. CREO owns an office block and shopping centre there, and is planning a second one of each that will be connected to the existing building.

At the same time, Macau gambling magnate Stanley Ho and luxury goods player LVMH are planning a high-end shopping mall for the area. CREO paid £5 million for 5 per cent of this project and the entire complex will consist of three linked malls and office blocks.

The existing office and retail blocks have a rent roll of €27 million a year, according to Landsbanki analyst Charlie Murphy.

Its second retail-office building, Central Plaza, in the centre of the city, has a roll of close to €10 million. CREO is refurbishing this to raise the quality. All told, its development costs in both Hongqiao and Central Plaza will run to about €170 million.

According to Steven McCord of commercial state agent Jones Lang LaSalle, Shanghai, demand for offices in the city is strong, driving growth in both values and rents. His figures show that rents are increasing by 14 per cent a year, while the assets are increasing by 26.7 per cent in the western side of the city.

Vacancies are running at about 1.9 per cent, which McCord says means that there is in reality no space available.

In terms of prime retail space, McCord says that rents are increasing by about 11.5 per cent a-year, while values heading north at a rate of 14.5 per cent a-year. Central Plaza is situated in an area that attracts prime rents, which run at €5.29 per square metre per day (commercial values are measured per day in the city), while Hongqiao shops are let for a around €1.96 per square metre per day

Barrett explains that, while the rent yields from CREO's properties fall below the actual interest costs, the company has hedged on renmimbi (Chinese currency) futures against the dollar to give it a return of 1.5 per cent over the cost of servicing the debt. Barrett describes this as a "startling investment opportunity".

CREO's plans for Hongqiao include redeveloping the entire complex so that it is repositioned at the middle to high end of the business from its current spot further down the retailing chain. It is currently negotiating with the likes of H&M, Zara and Next, which are interested in taking space there. H&M is an existing tenant of Central Plaza. At the moment, it's unlikely that Westerners would recognise any of the shops in the existing centre.

Barrett says that Shanghai is enjoying a retail boom. Before the second World War and the subsequent arrival of communism, Shanghai was the most expensive city in the world. Barrett is bullish about the prospect of this happening again, arguing that "everything that is happening says it will reclaim that position sooner rather than later".