Struggling to contend with their capital positions, increasing numbers of Chinese property developers have been turning to alternative routes of raising finance. Forced away from traditional funding channels like the public debt markets and bank lending, the instances of freshly-forged unions directly with institutional investors to fund their pipelines are mounting.
The structure of these partnerships is varied as developers offer flexible terms to these surrogate capital providers. In some cases, developers are even diluting control over their projects.
In January this year, Dalian Wanda, owned by one of Asia’s richest moguls Wang Jianlin, became the latest developer to seek institutional capital for its development projects by raising RMB24 billion (€3.3 billion; $3.8 billion) from four domestic investors to finance the construction of 26 new shopping malls in China. It was the first time the firm had brought in outside investors.
Wanda dubbed the move an ‘asset-light strategy’ that was geared towards moving the business to a more rent-driven model and away from a dependence on sales.
As per the financial arrangements of the deal given in a company statement, 60 percent of the rental income from the projects would be shared among the investors: China Everbright, Harvest Capital Management, Sichuan Trust, and KuaQianPayment and Settlement Service. The firm predicted this arrangement would ensure a return of at least 7 percent for the investors over the first decade.
Richard Yue, co-founder of Hong Kong-based private equity real estate firm Arch Capital Management, has witnessed close-up how Chinese developers were no longer able to tap domestic capital as they once did. And with mounting regulation dictating which domestic lenders can (and cannot) finance, shaking hands directly with institutional capital has become more attractive.
He said: “This [model] is like doing a project-specified REIT. For the investors, it is like buying into a pool of income.”
A new dynamic
Yue sees such partnerships continuing to be attractive for both domestic institutions and foreign institutional capital managers. But he warns there will be a fallout to developers tapping these kinds of capital sources. For one, it changes the dynamic of their involvement.
Wanda declined to comment further on its strategy. But according to a company statement on the deal, the developer has responsibility for site selection, construction, tenant prospecting, operation, and management of the assets as well as leasing.
According to Charles Ma, who heads China Vanke’s global strategy, investments and business development team, a developer using other people’s money needs capabilities beyond project development. Most important among them is institutional-grade compliance and reporting functions.
A second point of concern is how the developer allocates its institutional funding across its pipeline. Not used to outsider money, a recognized fear is that the developer funnels it into its less desirable projects while deploying its own resources into safer bets.
Said Ma: “Some developers may see raising a fund as a way to gain access to cheap capital for the development of risky or less desirable projects, which they wouldn’t fund out of their own balance sheet.”
A third issue revolves around discretion and leadership. With few Chinese developers used to finding themselves answerable to institutional capital partners, getting used to such a shift in dynamic is of paramount importance. Yue said much depends on how passive or active the investors are.
Vanke’s Ma calls this dilution of control a ‘trade-off’ in return for the funds they need. Given the current market climate in China, he said: “It is something that developers need to embrace if they are leveraging other people’s equity. If developers chose fund projects all from their balance sheet, they run the consequences of heavier debt, which weighs down on their return on equity and affects their credit rating,” he said.
Whether Chinese developers regard institutional partners as an additional funding option or merely a stopgap for until traditional funding sources return remains to be seen. In the meantime, institutional capital has a window.