EBA Asset Management reaps rewards of management overhaul
The property investment fund now aims to take on more shopping malls, says vice-president Zhou Songming
EBA Asset Management, the real estate investment arm of China Everbright, outperformed the market because it chose to focus on a complete overhaul of management culture rather than the traditional mathematical methods used by equity funds, its vice president said.
A mechanism designed to motivate project managers by aligning their personal interests with the success of a project also helped the fund to deliver fat returns for investors in China’s commercial property industry, a sector whose glut of supply has kept many overseas investors at bay.
“Mathematical method in many cases failed to capture the potential of a project,” said EBA vice-president Zhou Songming, referring to the calculations a typical property equity fund makes when deciding whether to invest in a project or not.
EBA has targeted markets that have either strong economic fundamentals, like those in first-tier cities, or robust consumer cultures such as Chongqing, Chengdu, Wuhan and Changsha.
Zhou said: “Of course we look at the basic metrics such as GDP, population density, per capita income, and project-specific metrics such as the scale and surrounding competitors. The decisions are made on various factors, not one. For example most of the projects in Chengdu are risky due to severe oversupply there, but some at particular locations are doable.”
Of all their projects, the Chongqing IMIX Park retail mall best illustrates EBA’s approach and how a change of management teamcan make a real difference to a shopping mall.
In 2011, EBA teamed up with a local company to take over the project from other developers. Although located in Guanyinqiao, a central business district in Chongqing, it was well known that the project had been struggling, with ownership changing hands frequently.
EBA’s then-partner failed to turn it profitable after a major overhaul that transformed the site from an apparel wholesale market into a shopping mall. This forced EBA, originally a debt-financing investor, to take the helm and start operating the project in 2013.
Zhou said the original operator’s redesign of the mall - turning it into a youth culture hub - was fine, and EBA kept it unchanged after takeover. The real problem was the operation team. It failed to lure good brands, mainly because the business development staff were driven by personal benefits, not what was best for the mall.
So EBA established its own operations team, having previously focused purely on debt-financing with virtually no asset management personnel on board. The whole culture was transformed, putting the value of the project, rather than individual benefits, at the forefront.
Project managers were now allowed to make major decisions, as long as they took full responsibility for the outcome. In this way, the success of the project was closely linked to his or her financial gains.
“The integrity and the devotedness of the team made all the difference,” Zhou said. “The team is entrepreneurial. The whole dynamics within it changed. Quality brands love to deal with such a team.”
A surge in visitor numbers and rental revenue has tripled the net operating cash of the mall from 40 million yuan in 2013 to 120 million yuan this year. With traffic of 15.96 million people in the first half of 2016, the mall has become a Mecca for young shoppers in the city.
On September 29, the Guanyinqiao IMIX Park-backed asset securitisation programme was officially listed on the Shenzhen Stock Exchange, allowing EBA to exit with a 27 per cent internal rate of return, according to the company. The final interest rates were set at 3.8 per cent for the 1.3 billion senior tranche A notes and 4.3 per cent for the 300 million senior tranche B notes, establishing record-low interest rates for industry products of its kind.
Zhou said one of his priorities is to increase the number of malls under management because economy of scale is “crucial” for the business. Operating more malls across different regions could help the fund to increase its bargaining power with developers and reduce the management costs of individual projects.
“For asset managers, the cost of managing two or five projects is the same. So the more, the better,” he said.