Hua Xia Grandjoy Commercial Real Estate Investment Trust recently disclosed its fund prospectus, planning to raise 5.555 billion yuan by listing the Tianjin Grandjoy project as the underlying asset on the capital market. As the sole underlying asset of the fund, the Tianjin Grandjoy project is located at No. 2 and No. 6 Nanmenwai Street, the core business district of Tianjin. It has been operational for over 14 years since its launch in December 2011, covering a construction area of 311,600 square meters, with a leasable area of 89,800 square meters. As of the end of March this year, the occupancy rate stood at 98.43%, with a valuation of 6.501 billion yuan.

Regarding the transaction structure, after the fund contract takes effect, the fund will use the initial capital raised to subscribe to the CITIC Securities-Grandjoy Commercial Real Estate No. 1 Asset-Backed Special Plan, which will then acquire the SPV company, and the SPV company will subsequently acquire the project company. Revenue growth for the underlying asset has nearly stalled.

From 2023 to 2025, the weighted average occupancy rate of the Tianjin Grandjoy project rose from 96.47% in 2023 to 97.84%, but the effective rent during the same period declined steadily, falling from 464.62 yuan per square meter per month to 451.60 yuan, and further to 445.29 yuan. The project's revenue primarily comes from rental income, property management fees, and marketing fees, with its operational performance directly reflected in financial indicators. After reaching a peak in 2023, operating revenue almost stagnated, amounting to 555 million yuan, 542 million yuan, and 546 million yuan for 2023, 2024, and 2025, respectively. Over the same period, net profit was 221 million yuan, 226 million yuan, and 222 million yuan. Meanwhile, EBITDA, a key indicator of core profitability, continued to decline, dropping from 415 million yuan in 2023 to 411 million yuan in 2024, and further to 403 million yuan in 2025.

High valuation and optimistic assumptions. The slowing operational data did not affect the valuation of the Tianjin Grandjoy project. As of the end of March this year, the total valuation of the real estate project was 6.501 billion yuan, with a book value of 2.598 billion yuan, resulting in an appraisal premium of 3.903 billion yuan and a premium rate of 150.27%. The valuation is based on a series of assumptions. For fixed rent, the appraisal report assumes that during the forecast period, the rent for specialty stores, island counters, and sub-anchor stores will not increase in the first year, with a 3% annual growth rate from year 2 to year 10. For anchor stores, there is no growth in the first year, with a 1.5% annual growth rate from year 2 to year 10. This growth rate is significantly higher than the actual negative rent growth observed in the project over the past two years. The operating data disclosed in the prospectus shows that in 2024 and 2025, the Tianjin Grandjoy project's rental income growth rate was negative, at -1.67% and -0.60%, respectively. For percentage rent, the appraisal report assumes that during the forecast period, percentage rent income will start from the actual 2025 figure, with an annual increase of 2% in year 1 and year 2, 1.5% annually from year 3 to year 8, and 1.0% annually from year 9 to year 10.

Cushman & Wakefield used the income approach with the yield capitalization method for valuation, the core logic of which is to discount the net income generated by the project over the next 40 years to the appraisal base date using a yield rate, then sum them up to derive the value or price of the real estate asset. The first 10 years serve as a detailed forecast period, while from year 11 to the end of the income period, a long-term growth rate of 2% is applied continuously. The valuation result is highly sensitive to the discount rate and capitalization rate. For this appraisal, the Tianjin Grandjoy project used a discount rate of 6.25% and a capitalization rate of only 5.25% (5.41% after considering capital expenditures), indicating that the valuation is highly sensitive to changes in income. A stress test in the report shows that if the net operating income falls by 10%, the valuation would shrink by 10% to 5.853 billion yuan. If the discount rate increases by 0.5%, the project valuation would drop by 6.7% to 6.065 billion yuan. If the long-term growth rate decreases by 0.5%, the project valuation would fall by 3.5% to 6.274 billion yuan.