• DECEMBER 24, 2008

Builder Soho China Stumbles in Beijing

By IAN JOHNSON and JASON LEOWBEIJING -- Already struggling with the global slowdown, one of China's best-known companies, real-estate developer Soho China Ltd., also has been hit hard by something less expected: political missteps.
ImaginechinaBeijing's skyline features buildings by Soho China, which has run into trouble over its development of a historic area in the city.

Soho's difficulties with a project in one of Beijing's oldest districts illustrates how even one of China's savviest Western-oriented companies can fall victim to the opacity of the country's real-estate market. Soho said it went into the project hoping to save the old district, known as Qianmen; instead, swaths of historic buildings have been leveled and Soho remains locked out of revenue.
Headed by the husband-and-wife duo of Pan Shiyi and Zhang Xin, Soho rose to prominence by buying up old industrial plots and hiring Western architects to produce glitzy commercial property that it sold to newly wealthy Chinese. Along the way, the media-friendly couple earned attention and acclaim around the world, making them emblems of China's economic rise.
Last year, Soho capped its successes with a public offering on the Hong Kong stock market that raised $1.65 billion. In Beijing's Central Business District, its buildings, topped by the company's logo, are seemingly ubiquitous.
But Soho has been hit hard by the global downturn. Its stock is off nearly 70% from its 52-week high, as are other Chinese real-estate companies'. From an initial offering price of 8.30 Hong Kong dollars, and a peak of HK$10.20, it closed Tuesday at HK$3.30 (43 U.S. cents). In the first half of the year, the company reported a loss of $21 million, compared with a profit of $9.2 million for the same period last year.
Zhang Xin

That mirrors problems at other Chinese real-estate developers, such as China Vanke Co., which said this month that revenue from real-estate sales in November fell 16% from a year earlier, as property prices remained weak. Consumers aren't buying apartments and companies are cutting expansion plans.
Soho's problems, however, have been made worse by longer-term woes afflicting Chinese real estate. In China, local governments have few sources of money; the country has no property tax, while income taxes go to the central government.
So local officials rely on real-estate deals, which usually involve pushing out residents in exchange for modest compensation and flipping the land to developers for a profit. Over the past decade, such deals have resulted in numerous high-level corruption cases, as well as protests, but none involving Soho.
Until last year, Soho had avoided sensitive projects. Then it decided to take on the redevelopment of a labyrinth of alleys and lanes in Beijing's old quarters.The Qianmen district was one of the last functioning old-town neighborhoods in the city of 17 million people. Soho's plan was to rebuild the district into a pedestrian mall of faux-1920s shops.
But the project quickly ran into trouble. It had the backing of the local district government, but contravened Beijing's historical preservation plans, which had called for Qianmen to be protected. When nongovernmental activists learned of the project, they protested. One group, the China Heritage Foundation, posted an eight-page critique of Soho's plans on the Internet, saying it threatened to wreck a valuable neighborhood.
Soho was involved in the project indirectly through a company owned by Mr. Pan, the chairman, who invested in a company owned by the district government. The idea was that Mr. Pan would sell his share of the company to Soho, according to Soho's stock prospectus.
What happened next is in dispute. According to preservationists, some of whom work for local governments, that transfer has been blocked permanently by the Beijing city government, which is investigating the project for violating preservation rules. "The city government was angry and blocked anything else happening there," said Wang Jun, an author on Beijing's conservation.
Pan Shiyi

City and district government officials declined to comment.
Soho's version is somewhat different. "That [conservation] alone is not the issue," Ms. Zhang, Soho's chief executive, said in an interview. Instead, she said the problem is primarily with a government austerity measure put in place early last year when the Chinese real-estate market was heating up. That made it harder for foreign-listed companies to invest in Chinese real estate. When that policy is lifted, she said, Soho will gain the assets.
Soho hasn't lost money on the project because it hasn't paid for the assets. Overall, analysts said the company is sound, with $1.4 billion in cash. It recently bought back some shares, which has helped stabilize the stock price.
But the project remains off Soho's books, crimping its prospects. Soho said that by the end of 2009, it will develop another 13.5 million square feet of gross floor area. With the Qianmen project, that amount would have increased 30%. One Hong Kong brokerage estimated earlier this year that with Qianmen, Soho's net asset value would be boosted 50%.
Worse might be the potential damage to Ms. Zhang and Mr. Pan's image in the West. The couple won awards and notice for their buildings' architecture, but are now involved in a project that is destroying an old neighborhood and replacing it with a replica.
"A lot of other people, me included, had a very different view of what conservation was," Ms. Zhang said. "Qianmen is a headache."