China property

Chinese co-living firm Harbour launches US$1.58 billion fund to build more rental housing

Gaw-backed Shanghai-based brand set to focus on securing wholesale land plots at low prices

PUBLISHED : Thursday, 24 May, 2018, 1:26pm
UPDATED : Thursday, 24 May, 2018, 10:45pm

Harbour, a Shanghai-based co-living space operator backed by Gaw Capital Partners and Trustbridge Partners, has launched a 10 billion yuan (US$1.58 billion) buyout fund with a financial leasing company to acquire land plots for rental flat development, on top of another US$1 billion fund with Gaw to acquire existing properties for flat conversions.

Its new foray into such heavy-asset territory sets Harbour apart from most of China’s private equity (PE)-backed flat operators, as it has predominantly opted for an asset-light model, where firms have relatively few capital assets compared to its operations, either leasing entire buildings and subleasing them to tenants, or signing management contracts with landlords.

The new fund is set to focus on securing wholesale land plots at low prices.

“Now we have an asset-light as well as asset-heavy model: the former is following Daito Trust Construction, and the latter is China’s answer to EQR,” said Huang Haibin, Harbour’s CEO, who founded the operation in 2015 after being president of real estate PE under Fosun International.

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Daito Trust Construction is Japan’s largest flat-management firm run on an asset-light model, while EQR is a US real estate investment fund (a Reit) that invests in the flat sector.

Various players, including developers, property brokerages, hotel management firms and PE-backed start-ups have jumped onto China’s burgeoning co-living space sector bandwagon, as the Chinese government continues to push the idea of renting homes instead of buying, to ease the rampant tendency of recent years of buying simply for profit, as property prices have soared.

The government sells plots designated for rental flat development much cheaper than those earmarked for commercial residential development.

To further encourage the sector, The China Securities Regulatory Commission, the country’s securities watchdog, has been fast tracking the approval of securities using rented properties as underlying assets, asset-backed securities (ABS), as such.

Ten of these securities, worth 50 billion yuan, have been issued since 2017, according to Guotai Junan Securities.

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CYPA, a Beijing rented flat operator backed by SAIF Partners, is the first and only one to issue a Reit-like product, which is now worth 270 million yuan.

It is able to sell equity – unlike other ABSs that are essentially debt instruments – after teaming up with SAIF to buy the properties that were then converted to flats, which in some cases have then tripled in value.

Harbour, which already received a 400 million yuan investment from Gaw and Trustbridge in August 2017, also previously attempted that route but without an asset-heavy approach it couldn’t sell Reit products.

With about 75 projects under its belt, it now has a portfolio of 15,000 rooms in Shanghai, Shenzhen, Beijing, Hangzhou and other top cities, and operates on the basis of leasing entire buildings and subleasing them. By the end of this year it will expand to 40,000 rooms, Huang said, adding it plans to open flats in Hong Kong in the near term, although no specific location has been finalised.

He said Harbour has just about completed the acquisition of two prime properties in Shanghai, and high-end properties will be developed there. Harbour’s target market has always been medium-to high-end units.

As well as the newly formed fund with Gaw Capital, it launched a 10 billion yuan fund with Far East Horizon, a financial leasing firm backed by state-owned Sinochem Group, that will buy plots previously already designated for rental development when they were sold.

The Shanghai and Beijing governments have sold a series of plots at much cheaper prices since the second-half of 2017, to support the rental flat development market, almost all sold to state-owned enterprises.

“Most of China’s asset-heavy flat operators run on low margins. The most viable way of improving their yield is to lower land costs, substantially,” said Timothy Chen, research director of Colliers International, East China, the global property consultancy.

Harbour has also established a strategic cooperation with Lingang Group, a Shanghai state-owned industrial estate operator, to provide operating services for their existing land and properties.

Flat ownership will enable the firm to issue Reits, alongside selling rental rights-backed securities by e-commerce funds, for it is paid a fee, and find other sources of income from tenants, Huang said.

“In future there will be abundant ways to cash [in] on tenants other than rent, such as connecting various e-commerce firms with tenants,” Huang said.

“But to make it a significant revenue source, you have to run at least 500,000 rooms.”