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.
Based on a number of recent examples, there are two basic variations in the manner in which the asset-light strategy is being implemented in China.
Under the first major approach, the direct-investment model, developers fund their projects by dividing their original interest in the project between a smaller number of major external investors.
The second basic approach is to utilise crowdfunding, which takes advantage of the huge amount of excess investment funds available in the mainland market, and which gathers this funding to use in the context of raising debt for one commercial development project or a group of development projects.
Since these institutional and individual investors have only provided debt to the major developers running these schemes and have not been offered an equity stake in yet to be developed malls, this activity does not contravene mainland law.
Recently, Dalian Wanda Commercial Properties announced it will increase the number of Wanda Plaza commercial complexes it plans to open in China to between 400 and 500 by 2020, an expansion plan requiring investment on a scale running to hundreds of billions of yuan. In January it signed an investment framework agreement with Everbright Ashmore, Harvest Fund, Sichuan Trust and 99bill. Collectively, the four companies plan to invest 24 billion yuan in the development of the first group of Wanda Plaza projects, which number about 20. Establishment of this equity investment platform signalled Dalian Wanda’s formal launch of an asset-light strategy. In the future “Commercial Properties” is likely to be removed from Dalian Wanda’s company name as it progressively transforms itself into a commercial investment-management firm.
In December Wanda also set up its own e-commerce company, spending 2 billion yuan to acquire a controlling stake in the 99bill.com online finance platform, which is largely engaged in online payment and lending. In June, Wanda Group and 99Bill jointly introduced mainland China’s first commercial property crowdfunding venture, called Stable Earner No 1.
Funds raised from on-line subscribers will be directly invested in the construction of a separate group of Wanda Plaza projects.
Stable Earner No1, is in fact, an alternative banking financial product of a type which Chinese developers have been heavily using in the past couple of years. The fact that such products have achieved such popularity is significant in that they deploy many of the tools which the internet plus age makes available to larger, reputable developers in China to broaden their channels for raising project-related debt finance.
Following closely on the heels of Dalian Wanda, a number of other major China developers also moved to set up similar e-commerce or internet financing platforms, with the intention of issuing similar on-line finance products to tap into China’s vast number of citizens to finance their future development projects. It is highly likely that in the future, variations on raising finance by using the crowdfunding model will become more numerous in the China real estate market, in line with development of a broader and more detailed body of regulations governing the permissibility of using information technology platforms to raise funding to back commercial real estate development.
Andrew Ness is head of research, greater China, at DTZ/Cushman & Wakefield
