Why Vanke’s bought into Anhui lender
22 Nov 2013
Week in China
He’s climbed Mount Everest twice and he’s led expeditions to the North Pole and the South Pole.
So perhaps it should come as little surprise that Wang Shi, the adventurous chairman of Vanke, China’s largest property developer by revenue, now wants to take his firm out of its comfort zone.
Last month Vanke surprised investors by announcing that it has become a cornerstone investor in Huishang Bank’s Hong Kong initial public offering.
Importantly, the stake in Huishang means that Vanke can soon offer new homes plus the financing necessary to purchase them
The deal sees Vanke putting $442 million into the
Anhui-based lender and becoming Huishang’s single largest shareholder.
It isn’t the first time that Vanke has sought to diversify away from its core business but it has mostly stuck with property-linked industries like property management services or elderly care homes.
The deal with Huishang is a more radical departure from the property arena – although most analysts say that investing in banks makes sense. Generally banks boast higher return on investment, says CBN. Last year Huishang saw its return on assets reach 22.9%, higher than Vanke’s 19.6% over the same period.
Importantly, the stake in Huishang means that Vanke can soon offer new homes plus the financing necessary to purchase them.
The move will help boost sales by opening up competitive mortgage rates to buyers, says Xinhua. And in explaining the
move, the Shenzhen-based firm confirmed that it is investing in Huishang so it can “better meet its customers’ demands for financial services”.
The venture could deliver other benefits, the Economic Observer suggests, like better financing terms to its thousands of suppliers and contractors. By hooking them up with more favourable loans, it could help drive down its procurement costs.
Vanke isn’t the first property firm to try its luck in commercial banking. Hopson invested in Guangzhou Rural Commercial Bank in 2009 and holds about 5% of the bank’s shares. Similarly, Kingold in Guangzhou is a 20% shareholder of Huaxing Bank, while Poly Real Estate owns 8% of Everbright Bank.
More recently, Yue Xiu Group, an investment arm of the Guangzhou city government with property interests, announced that it had agreed to buy 75% of Chong Hing Bank – the smallest of Hong Kong’s family-owned lenders – for $1.5 billion. In August, Shanghai-based Greenland Group signed a co-operation agreement with the Guizhou provincial government to look into the possibility of establishing a commercial bank in the city.
The venture could deliver other benefits, the Economic Observer suggests, like better financing
terms to its thousands of suppliers
“Vanke and Yue Xiu are testing potential synergies with banks,” says David Hong, the head of research for China Real Estate Information Corp. “The acquisitions provide better control of funding both for the firms themselves and for individual home buyers of their properties.”
China’s housing market is now shifting to “structural oversupply,” GaveKal, a consultancy, told The Economist this month. Housing completions rose to 1.1 billion square metres last year, nearly double the figure before 2008.
Analysts say that if the economy hits a rough patch and sales start to slow, the more desperate developers could start a cycle of price cuts.
Perhaps that’s another reason why developers have been seeking to diversify, including investing in property markets outside China. Outbound investment exceeded $5 billion as of the third quarter, already surpassing the previous record of $4 billion in 2012, says Jones Lang La Salle.
Others are staying in the industry but trying to establish more business in niche areas.
Take Fantasia, another Shenzhen-based developer. It has been investing heavily in building up its property management business – called Colour Life Services – winning contracts for projects that aren’t developed by the mother company.
The strategy seems to have paid off. In August Fantasia submitted a proposal to spin off Colour Life in Hong Kong. As one of China’s largest property management concerns, the proposed IPO will give investors a chance to buy into a steadier sort of Chinese real estate play.
Week in China
Week in China helps keep you up to date with the key business news from the world's fastest-growing large economy. It is produced on an exclusive and complimentary subscription basis for HSBC's corporate and institutional clients.