You know life is tough for China’s property firms when big name developers make plain they want to get out of real estate. A prime case is Dalian Wanda which recently announced plans to lower the revenue contribution from property to less than 35% by 2020 from the current 66%. The company says it wants higher sales from its film studio and theme parks instead. Wanda’s boss Wang Jianlin remains keen on diversifying outside China too. Last year he bought a landmark building in Spain’s capital. And this week he sealed a $52 million deal to buy a 20% stake in Spanish football side Atletico Madrid.
Investing in soccer clubs does not always have happy outcomes, but the logic of Wang’s diversification is sound enough. China’s housing market is in the doldrums. In December, official data suggested home prices fell for the fourth consecutive month.
Commercial property, too, is not as lucrative as it once was. In a sign that the developer has turned increasingly bearish here too, Wanda Commercial, which last month raised $3.7 billion in a Hong Kong listing, has just partnered with four domestic firms to finance the construction of 26 new commercial projects. Notably it’s the first time Wanda has brought in third-party capital to fund real estate ventures. The four investors – which include the property investment arm of China Everbright – will bring in a combined Rmb24 billion ($3.9 billion).
Wanda Commercial will be responsible for site selection, construction, tenant prospecting, as well as the management of the 26 new Wanda Plazas. Meanwhile, the rental income will be split 60-40 between the investors and Wanda, says the Financial Times.
The partnership won’t be the last. Wanda says it is talking with several local and international investment banks, insurance companies and investment funds about putting money into its property projects. It expects to announce similar deals in the first half of this year.
Wanda is not the first developer to adopt this strategy. Vanke, for instance, has partnered with US private equity firm Carlyle to develop nine malls in China. Separately, it is also working with Blackstone in real estate projects linked to the logistics industry.
“By relying on partnerships to fund its projects, Wanda is following a path blazed by China Vanke and other developers in adopting an ‘asset-light’ strategy which allows it to spread its project risks to investors while collecting a premium for its development expertise,” says Mingtiandi, a property blog.
Another practical reason behind the partnerships: Wanda can rely less on bank loans for financing. As mentioned in last week’s Talking Point, property developers have been replaced by internet firms as the new darlings of local government officials (who often give the nod to local bank branches on key lending decisions). The Paper, a state news portal, says that Chinese banks have severely “tightened” their lending to property developers, which makes it very difficult for them to raise funds and obtain favourable lending rates.
“Other than providing support for small businesses, commercial property loans have become few and far between. The e-commerce industry certainly has an impact but the truth is, bricks-and-mortar is basically shrinking,” one senior executive at a state-owned bank told The Paper. “We are worried that the operating income for developers cannot cover the repayment, even if the developments are in first-tier cities.”
There are reasons for the banks to be worried. Century Weekly reported that Wanda has had trouble finding tenants for a retail-office complex in Putian, a city in Fujian province. Another commercial mall in Zhejiang’s Yuyao was fully tenanted till recently, but is now less than 80% occupied.
Early this month, Wanda also closed 10 of its department stores due to poor sales (it plans to restructure 20 more).
“Commercial properties are more problematic compared with residential,” the banker continues. “That’s because the main source of revenue for commercial properties is rental income. At the moment, with the economy in a downturn, this income source for developers has become very unstable.”
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