Property financing

Chinese shopping mall operators looking to offload bricks and mortar to cut costs

Feeling the pinch from rising costs of land holding and as e-commerce takes off, operators are securitising property and using the cash freed up to expand

PUBLISHED : Thursday, 09 June, 2016, 6:36pm
UPDATED : Thursday, 09 June, 2016, 6:36pm

Chinese shopping mall operators, faced with the rising costs of holding land and the impact on bricks-and-mortar stores of e-commerce, are seeking to securitise their assets and use the cash for expand into new developments.

The so-called asset-light model allows operators to continue to run the mall business and benefit from rental income, although analysts cautioned that it is too early to say yet whether the schemes will help the companies’ bottom line.

In May, Intime Retail, which owns 46 high-end department stores and shopping centres in mainland China, announced its first asset-light arrangement for its Dahongmen store in Beijing.

Intime and China Merchants Bank jointly set up an asset management body, with Intime putting in 330 million yuan and the bank 500 million yuan. The money went to buy the Dahongmen store, which was then leased back to Intime at a fixed annual rental of 68 million yuan for five years.

The arrangement “allows the company to release the capital previously invested in the Beijing Dahongmen Store,” Intime said, adding that it can use the cash to pay off the debts and re-invest in its core business of retailing.

“Through securitisation, developers can still operate the projects while withdrawing cash, and if one succeeds, other projects later can copy this model. The capital can help them expand fast,” said one property analyst, who declined to be identified.

Another possible avenue for mall operators is the use of a form of real estate investment trust (REIT).

At the end of 2015, Shenzhen-based Rainbow Department Store completed China’s first so-called state-owned REIT project, packaging its Shenzhen store into a REIT that was listed on the Shenzhen exchange.

“REITs could be a way out for the retail industry, but in China, REITs are still in their exploratory stages,” said David Hong, head of research at China Real Estate Information Corp.

Talk of introducing REITs in China has been around for some years, but legal and procedural hurdles have prevented the investment structure from taking root. Instead, quasi-REITs have popped up, like the Intime arrangement. These are structured similarly, and have more restrictions than traditional REITs.

“The key problem is that there is no tax exemption for REITs in China. The financing costs could be very expensive,” said Hong.

According to Intime, the annual cost for the 500 million yuan fund raising through the asset management scheme is about 7.5 per cent, more expensive than issuing a domestic bond.

“We have been in talks with funds about turning some of our shopping plazas to quasi-REIT products, but there are so many conditions such as buy-back guarantees and return requirements, ” said Ouyang Jie, a vice-president at Shanghai-based property developer ­Future Holdings.

Ouyang said the costs are bit high, so the developer is still evaluating whether to go ahead.

He hoped the government could loosen rules on REITs soon to boost the rapid growth of commercial property sector.

But analysts said it will take time for REITs to become common in China as there needs to be legislation as well as tax reform.