Will China developers go asset light?

November 1, 2017 / By  

2016 was a record year for China as investment transaction volumes topped an eye-popping RMB 209 billion (about US$31.5 billion), a year-on-year increase of 52 per cent. This momentum carried through to 2017, as total real estate transaction volumes for the first nine months reached RMB 125.2 billion (roughly US$18.8 billion), or a 6.0 per cent year-on-year gain compared to the same time last year.

Wanda’s surprising firesale in 3Q17

Just when the market appears to be headed for another record year and domestic investors remained optimistic and active, Wanda surprised the market in July with a firesale by disposing its hotels and theme parks for a total of RMB 63.7 billion (roughly US$9.6 billion).

Reportedly, Wanda sold its hotel portfolio, or 76 hotels in total, to Guangzhou R&F Properties for RMB 19.9 billion (roughly US$3.0 billion). On the other hand, Sunac China paid RMB 43.8 billion (roughly US$6.6 billion) for 13 tourism-related projects, including theme parks from Wanda*.

On paper, this transaction made sense for all parties involved. For Wanda, having an extra RMB 60 billion (roughly US$9.0 billion) of cash on hand to pay down its existing debt of RMB 200 billion (about US$30.1 billion) will allow the company to strengthen its balance sheet and have liquidity for future opportunities.

From Sunax China’s standpoint, owning the theme parks will increase consolidated revenue and possibly cash flow on hand. In the case of R&F Properties, the company already operated 24 hotels worldwide under international brands such as Marriott and Hyatt, and buying Wanda’s hotel portfolio will add 76 high-quality assets to China at a relatively low cost.

Sometimes less is more

Since 4Q is traditionally the hot season for transactions, total investments in China in 2017 will likely match or surpass the record-year of 2016. With capital flow controls, optimistic domestic buyers will continue to be the dominant and active buyers in China, especially fund management and insurers, as both have ample cash on hand with relatively low exposure in the real estate sector.

However, while aggressive buyers will remain in the market, cash-strapped and highly leveraged developers could be cashing out. The situation was especially aggravated in 3Q17 when China’s Banking Regulatory Commission (CBRC) instructed domestic commercial banks to review their credit exposure to real estate developers, and stop further unnecessary lendings.

Wanda’s disposal could be the start of a trend or it could be an anomaly, and it remains to be seen if other developers will follow suit. However, if CBRC continues its credit-tightening policies and close regulatory scrutinies, developers could be forced to change their business model and adopt an asset-light strategy in the future. If so, sometimes less is more, and a short-term change could translate into a long-term gain.

* Note: Wanda’s RMB 43.8 billion deal with Sunac China is excluded from JLL GCF’s transactions, as tourism-related theme parks are not recorded in our database. 

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