Last year when Tencent, Alibaba and Ping An decided to set up an online insurance joint venture, Chinese media dubbed it the ‘collaboration of the three Mas’. That’s because the chairmen of all three companies share the surname Ma (which means ‘horse’ in Chinese).
But the recent partnership announced between Vanke and Dalian Wanda may trump that of the Ma triumvirate. Tellingly, the chairmen of the two property firms – Wang Shi and Wang Jianlin – share the same surname, which means ‘king’ in Chinese.
Coincidence or not, the pairing looks a mighty one. Vanke is China’s leading developer by residential sales, while Wanda is the country’s biggest commercial property firm in terms of asset size. In 2014, Vanke and Wanda had a combined revenue of more than Rmb450 billion ($72 billion).
Both Wangs have very ambitious plans too.
Under a preliminary framework agreement, executives from both companies will form a task force to look at land acquisition and project development. The division of labour is clear: with Vanke developing the residential portion and Wanda the commercial side. Some existing projects – currently under separate development – may be brought into the new partnership on a case-by-case basis, the developers said in a joint statement.
Of course, it’s not the first time property firms have joined forces. The idea is to split some of the risks and costs. And by combining smaller players can also compete with much bigger rivals. However, it is the first time two domestic property giants have teamed up.
“Ever since the Chinese property market entered a phase where demand and supply reached equilibrium, developers needed a new line of thinking and a new model,” Wang Jianlin said in the statement, adding that the partnership with Vanke will also help Wanda “accelerate its asset-light strategy” as it looks to cut down the inventory risk on its balance sheet (see WiC267).
Wang’s definition of ‘equilibrium’, however, seems a bit far from the current reality. In April, new home prices dropped for the eighth straight month. Smaller cities, plagued by hefty inventories, are still struggling with falling sales and prices.
Which brings us back to the logic of Vanke and Wanda getting together. Industry insiders are overwhelmingly supportive of the partnership. Time Weekly calls the collaboration a “perfect match”. Shanghai Securities News praised it as “the dream team”.
By joining forces, the two will be in an even stronger position to acquire land on the cheap. “Land is the lifeblood in the property business. Land prices will directly affect the operating costs of the project and the final profit target. In an environment where land prices are rising and profits are falling, the cooperation between the two will definitely increase their bargaining power with local governments in negotiations. It will also render the two even more attractive for financial institutions, which will help keep costs down,” Shanghai Securities News suggested.
The collaboration could also facilitate knowledge-transfer between the two companies. Even though Vanke has been trying to expand its commercial property business in the past five years, it still lags Wanda in scale and experience.
“With the two in a partnership, Vanke’s residential development will likely be combined into Wanda’s multi-purpose development (which includes office and commercial development). Wanda’s commercial management and operation experience will also transfer to Vanke. The two complement each other so well the cooperation is equivalent to one plus one equals more than two,” says Zhang Hongwei, director of research at Tospur, a property consultancy.
Industry observers say the partnership between Vanke and Wanda will likely force other developers to join hands. Such a trend may even trigger further partnerships among property firms. A unit of Poly Real Estate, a state-owned property giant, said last week it will co-develop a resort in Guangdong province with rival Shunfeng. Separately, Poly Real Estate will also join hands with Citic Securities to develop an office building in Guangdong’s Foshan, says Southern Metropolis Daily.
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