Tongkong Investment relies on group strength for survival as real estate financing sector toughens
Chairman Zhang Baoguo says the days when lenders could earn fat margins without much risk, as property prices continued to rise, are long gone
Zhang Baoguo, the chairman of Tongkong Investment Group, is predicting that only private equity (PE) firms with strong parent companies and distinctive niche markets will be able to survive the downturn in China’s real estate financing industry.
Under the government’s directive to curb China’s property market, domestic banks shut their doors to medium and small-sized developers from 2010-11, creating a lucrative industry for non-bank financial institutions such as trusts, private equity funds and peer-to-peer lending platforms.
Pooling their money from yield-hungry wealthy individuals or the sale of wealth management products, these institutions could easily make money by lending to cash-hungry developers.
But the days, says Zhang, when lenders could earn fat margins without much risk as property prices nationwide continued to rise, are long gone.
He adds that loosening banking credit to developers and the emergence of the corporate bond market have dramatically broadened funding channels, and slashed costs, leaving many funds struggling to spot viable projects.
“Just two years ago, trust companies promised investors 14 to 15 per cent annual return. Now hardly anyone is offering anything above 8 per cent,” said Zhang, who earned his first fortune in private equity.
“Funds that extended debt financing to developers promised 12 to 13 per cent return, and even higher for bulk investors. Now few get a return higher than 10 per cent,” he said, adding existing funds are now having to adapt to China’s so-called economic “new normal”, of more sustainable growth.
Tongkong’s focus now, says the chairman, is being able to rely on the conglomerate’s own expertise and resources across its huge range of businesses – in chemicals, biotech, cinema, hospitality and automobile trading – to target takeover opportunities that are struggling to survive, particularly those related to tourism.
Its asset management operation has been built up through the creation of buyout funds with listed firms to jointly acquire companies in emerging industries.
It now has assets worth 10 billion yuan and funds under management of nearly 30 billion yuan.
Of all its businesses, Zhang highlights the real estate private equity arm as its primary asset, offering as it does “stable returns”, instead of “high returns”.
The group has also allocated assets to equities and in other industries, but compared to those, property performance is more stable.
“Until now, no single asset type can compete with property in terms of withstanding shock, and having room to appreciate,” Zhang said. “I see no chance of a collapse in China’s property market in next five to ten years.”
The conglomerate’s other businesses now share customers and sales channels with its PE arm, which can take over assets when funds mature and are left with no other exit channel, for instance, even if the yield at that time is less attractive, he said.
Zhang said the PE arm is increasingly focused on leading buyouts of distressed assets at a significant discount to market value.
In many cases, developers have found capital resources stretched after acquiring land, and that’s an opportune time for PEs to step in.
“Many projects have liquidity risk, not systematic risk. Two or three years after a takeover, if we can we bring the project new partners or the market improves, we can make huge money by adding the leverage the fund offers,” Zhang said.
Besides making opportunistic investments of its own, Tongkong is creating buyout funds with major developers under long-term commitments.
It has set up joint ventures with San Sheng Hong Ye, for instance, a real estate firm in Shanghai, and Sincere Group, Chongqing’s third-largest developer.
“The top ten developers have no problem in financing. What we are looking for are less-known developers but who still rank among the top 100,” Zhang said.
Tongkong is ideally looking for sites in second and third-tier cities that can be developed into tourism attractions.
It is currently under discussion on two potential projects in Xiangyang, Hubei province and Luoyang, Henan province, both of which were under threat as their developers ran into financing difficulties.