Concrete Analysis | Internet is changing financial landscape for mainland China developers
More industry players moving to asset-light development model
As the 10-year positive cycle in the China property market has progressively wound down, how to strategise for survival under the present, tougher market conditions is provoking a lot of deep thought on the part of both investors and developers.
Developers’ tighter profit margins, the expanded operating environment for domestic finance industry and the tighter links which have been forged between internet and other industries have collectively paved the way for greater acceptance of the “asset-light development model”. Exactly how that asset-light development strategy will impact the overall development of the China real estate market remains a subject of intense interest and debate.
The so-called “asset-heavy” model in real estate investment refers to the traditional approach which has typically been adopted in China whereby developers rely heavily on their own capital to retain ownership of their own commercial development projects.
Businesses engaged in real estate will have to become more forward looking, and more willing to engage in businesses crossing over one or more industrial boundaries
In China, where the real estate development sector is mostly dominated by traditional asset-heavy companies, the view is now spreading that deployment of “internet plus” will help to pave the way for establishing asset-light operations, permitting a larger number of developers to leverage their core expertise to integrate their skill sets more effectively with external resources to achieve synergies that open up new areas for value-added business.
In the future, it is likely that there will be many fewer – if any – real estate developers left in the China market, and the type of company which is now referred to as a “developer” will be replaced by a new type of hybrid corporate entity: “the real estate operator”.
As China enters more deeply into the internet plus age, all businesses engaged in real estate will have to become more forward looking, and more willing to engage in businesses crossing over one or more industrial boundaries. Experimenting with novel hybrid-business combinations will provide the key, opening the doors to multiple kinds of new ventures.
In the future, new hybrid corporate types comprising real estate plus internet companies, real estate plus e-commerce ventures and real estate plus finance undertakings will continue to appear in the market.
With respect to making initial investment in their projects, China developers have until recently relied heavily on direct bank loans or leverage obtained from shadow banking sources. However, as a consequence of the present market downturn, domestic banks have generally tightened up on lending to the property sector and the appetite for real estate lending on the part of shadow bank financing vehicles has also diminished.
