C-Suite Q&A: Asset manager EBA identifies opportunities in a traditionally low-yielding sector in China

Zhou Songming, the vice-president of EBA Asset Management and general-manager of the IMIX brand, is a 15-year veteran of China’s commercial real estate industry.

Before this, he was general-manager at FPD Raycom, a joint venture property management consultancy between Raycom Real Estate and Savills. Zhou also served as managing director of Savills West China and has directly managed shopping centres in Shanghai, Beijing, Chongqing and Ningbo. He has a master’s degree in business administration from Guanghua Management School, Peking University, and an EMBA degree from Fudan University.

Briefly introduce EBA?

EBA Asset Management is the real estate investment platform of China Everbright Limited. It has focused on private equity investment in China’s property market for more than 10 years, providing a highly experienced team with management capabilities in private equity real estate funds.

The IMIX Park commercial real estate brand created by EBA Asset Management now has operations in Chongqing, Shanghai and Beijing. We run, or are building eight projects, and the number is expected to reach 10 by the end of the year.

What’s EBA’s comparative advantage over other real estate private equity funds?

We have a very strong management team, made up of industry veterans with working experience at leading developers, while ordinary funds don’t. At the point of entering, we’ve already figured out the route through which we can add value to the project, the value three or five years later, and rental yield. On the other hand, compared to commercial real estate developers, we as a fund are more flexible and have more financial expertise.

I’ve always said that valuation is the outcome of “doing”, not “calculating”. In China it would be problematic if you just use financial models to calculate. I think funds need industry hands, just as securities brokerages need stock analysts who have experience in a certain industry.

What kind of winning formula can be learned from the Chongqing IMIX Park project?

There are many. Positioning is very important. You’ve got to make your project different from malls in surrounding areas. Introduced brands are important. The size of the mall also matters.

But the deciding factor is the integrity and the devotedness of the team. I’ve made it clear I won’t hire people with a bad character: those who take advantage of their post for personal gains. I won’t hire people with an attitude problem: you’ll achieve nothing if you are not fully committed, no matter how competent you are. I won’t hire people who are not down to earth: you can’t know what’s going on if you always sit in the office.

An incentive mechanism is key. We always take a bet with project managers that rewards them heavily if they achieve a target and punish them if they fail. If a project manager performed well I can reward him with more projects so his earnings multiply. You also have to strike a balance between headquarter’s control, and flexibility and entrepreneurship of projects.

The emergence of e-commerce has hit China’s commercial property hard, which already faces mounting oversupply. How do you spot opportunities in this context?

Opportunity often is the twin of challenge. After this round of oversupply, I think both developers and local governments will draw lessons from it. Developers without sufficient capacity dare not bid on commercial projects recklessly. For us the context actually leaves us more room to pick. We’re not in a hurry to grab projects unless we think the price is OK.

E-commerce has had an impact but it is overestimated. It has a disproportionate impact on different businesses. Generally low-end, standardised businesses are hit more hit while high-end, experience-focus businesses are relatively unscathed.

So it’s much more important to differentiate yourself. For example we used to do debt-financing like most other funds. The Chongqing project forced us to turn to equity-financing. It involves more risk and on-the-ground work but the merit is you can amass know-how and quickly scale up your business. Debt-financing cannot do this.

Many funds invest in office buildings but we rarely do that, because it’s not difficult. The threshold is low and competition fierce. Malls are much more difficult and the threshold is high. If we focus on that sector and build a national portfolio we can become one of very few funds who can do that. Individual projects’ return is not high but adding the leverage, capital return can be very high.