Soho China is facing mounting challenges, tightening regulatory scrutiny, and now an uncertain future after Blackstone called off its $3.3 billion deal to acquire the company, one of China's highest-profile real estate firms.

Soho China’s HKEX-listed stock dropped by as much as 40% on September 13 after Blackstone, the U.S. private equity giant, withdrew its takeover bid on September 10. Blackstone's offer of HK$5 per share would have valued Soho China at roughly $3.3 billion—a 31.6% premium.

Blackstone and Soho China said in a joint September 10 filing to the Hong Kong Stock Exchange that the deal fell through due to a “lack of sufficient progress in satisfying the preconditions [of the deal]”—preconditions that included antitrust approval from China’s State Administration for Market Regulation (SAMR), which the agency hadn't granted.

Beijing-based Soho China, founded in 1995, primarily holds commercial properties in Beijing and Shanghai, including the futuristic Wangjing Soho complex of skyscrapers designed by renowned British-Iraqi architect Zaha Hadid. Soho has developed over 54 million square feet of properties in the country, according to its website. The company rose to prominence in the early 2000s as it built a series of modern, high-end retail and office buildings in China's two largest cities. But since it went public in Hong Kong in 2007, Soho China has faced various hurdles and years of flagging profits.

After the failed deal with Blackstone, it's “highly unlikely” that Soho China will be able to find a new foreign suitor, given internal and external pressures, says Brock Silvers, chief investment officer at private equity real estate fund Kaiyuan Capital. "Soho China founders Pan Shiyi and Zhang Xin may have just missed their best opportunity for a quick exit,” he says.

Soho China's modern, futuristic skyscrapers and retail buildings that popped up in the heart of Beijing and Shanghai in the early 2000s came to symbolize China’s economic rise. Soho China's Hong Kong IPO in 2007 was Asia's largest commercial property debut, raising $1.65 billion, and that year, Soho China's share price reached an all-time high of $11.92.

But Soho China's fortunes started to sink in the years that followed. The global recession hit the company hard. By the end of 2008, Soho's share price dropped nearly 68% from its 2007 peak. Then, in 2012, Pan and Zhang, the married founders of the firm, revamped the company strategy to lease—rather than sell—the buildings it developed, betting that rents and property prices would rise in Beijing and Shanghai. Instead, the founders' strategy to turn Soho China into an office landlord reliant on rental income led to years of declining profits.

In 2020, Soho China's profit was roughly $248 million, a 17% drop from 2019, and an 81% drop from 2013, the year after the strategy pivot. Years of profit pressure—made worse by last year's pandemic hit to office rents—led Soho China to offload assets. In 2018, for instance, the firm sold the train-shaped Sky Soho building in Shanghai to private equity firm Gaw Capital for $800 million.

Last year, Soho China announced that it was exploring deals to sell itself. By March 2020, New York–based Blackstone became Soho China's preferred bidder. The PE firm held exclusive talks to take the company private in a $4 billion deal. Two months later, Blackstone pulled the plug on negotiations, stating that the COVID-19 pandemic had made it difficult to evaluate Soho's business outlook, according to a Bloomberg report. Then this June, Blackstone announced another bid to take over the once-mighty property developer.

China’s property developers are facing a liquidity crunch as the government tightens real estate companies’ access to credit in a bid to rein in the sector’s heavy debt, says Henry Chin, head of research, Asia Pacific at CBRE, a real estate services firm.

The credit tightening in the real estate sector will likely continue as the government “tackles the debt-laden sector and attempts to cap the rise in property prices,” says Cheng Wee Tan, senior equity analyst at Morningstar.

“Amid the current policy environment, it’s [expected that] large transactions [will] face a greater deal of regulatory scrutiny,” Chin says.

Soho China's 1.3 million square meters of prime office space means it's still one of China's leading office landlords with a stream of rental income, says Bruce Pang, head of macro and strategy at China Renaissance Securities. But the few assets in its pipeline and declining office rents mean its profitability remains under threat, Pang says.

Soho China did not respond to a request for comment.

Perhaps the biggest challenge to Soho China's effort to sell itself now are its two failed deals with Blackstone, a firm with deep China roots that's upbeat about the mainland market and whose CEO and founder, Stephen Schwarzman, is a longtime China bull.

When Blackstone, one of the world's largest property owners, with $196 billion under management, announced its second offer for Soho China in June, Blackstone real estate managing director Justin Wai said that the firm is "confident in China's long-term potential and economic recovery, which is well underway particularly in the Beijing and Shanghai office markets."

Last November, Blackstone acquired a $1.1 billion majority stake in a Guangzhou logistics park, expanding its China logistics portfolio by one-third. Blackstone in July raised over $5 billion for its second Asia fund.

The two failed deals—specifically, the SAMR's failure to approve the second bid—will be red flags to any future Soho China buyers, Pang says.

Outside of the Chinese government, “nobody…really knows why the SAMR didn’t approve [the deal]," says Silvers. But if Blackstone CEO Schwarzman "couldn't figure out how to gain approval—despite [his] deep China experience and relationships—it's unlikely that another foreign investor can do so," Silvers says.