Risks seen in joint ventures among Chinese developers

Joint ventures are a double-edged sword for mainland developers, industry analysts warn.

The pros are clear and numerous, including access to land reserves, smaller investments and the ability to leverage a partner's strengths. However, if not executed well, they add to risks and liabilities.

That is why market watchers are concerned about the partnership between China Vanke, the mainland's biggest homebuilder, and Dalian Wanda Group, its largest commercial property developer. While they can rely on each other's speciality in mixed-use projects, with Vanke taking care of the residential part and Wanda shopping malls and offices, and increase their chances of victory in bidding wars for land, there is still a high degree of suspicion about how successful they have been.

Industry data does not look promising. One in three joint ventures around the world ended up in dispute last year and 44 per cent did so in Asia, a region where joint ventures are becoming more common as projects grow larger and more complex, similar to what is happening in China's built industry, including property and infrastructure, according to international consultancy Arcadis.

"It's a new way of thinking," said Gary Howells, the head of contract solutions in Asia at Arcadis. "When you are operating in a joint venture, you cannot just do your own thing. You have to take into account what your joint venture partners want to do."

Companies also needed to swiftly respond to any changes when executing the projects, including delays, over-budget expenditure and sometimes even the liquidation of partners, he told the South China Morning Post.

However, there does not seem to be much that Shanghai-based developer Greenland Group can do to stem falling property sales and project delays in the mainland's northeastern rust belt.

Industry sources say the difficulties Greenland is facing are partly due to local partners running out of cash and being unable to proceed with construction as scheduled, although the company itself said only a few projects had been suspended.

Greenland topped Vanke last year to become the country's largest developer, with annual sales of 240.8 billion yuan (HK$304.6 billion). But in the first half of this year, it was only the third largest, behind Vanke and Evergrande Real Estate Group, with sales of 82.3 billion yuan, according to estimates by China Real Estate Index Academy.

A report by ratings agency Standard & Poor's last month said limited transparency created potential risks in mainland developers' jointly controlled entities, although it expected the joint venture trend to spread as property firms looked to improve scale and diversification.

"From our perspective, we believe jointly controlled entities hinder comparability among developers," S&P said. "These structures lack financial transparency and cash fluidity between projects."

It also pointed to the fact that although such entities helped Sunac China Holdings and KWG Property Holding create faster growth in operating scale, their consolidated financial performance in the past two years suffered because of higher leverage and falling profit margins.

About half of the mainland developers it rates use some form of joint ventures or associate companies that co-own certain projects and their average obligation at these entities is about 10 per cent of total debt.

"We believe jointly controlled entities can carry higher execution risks because they require companies to co-manage a project or integrate a jointly owned project into the existing operations of the parties involved," S&P added. "This could lead to project delays, weaker sales and lower project quality."