China’s biggest mall developer is planning to build 900 more shopping centres in the next ten years, and Dalian Wanda is turning to the country’s netizens to fund this ten-fold expansion of its retail empire.
Wang Jianlin, who heads Dalian Wanda Commercial Properties, announced recently that the company will launch its own wealth management product next month to raise investment capital directly from consumers, according to an account in the Wall Street Journal.
The new fund-raising approach is what Wanda is calling its asset-light strategy and closely resembles an initiative taken this month by rival developer Greenland Group to market its corporate debt directly to consumers via the Internet as traditional sources of capital become more difficult to obtain.
Creating an Online Pseudo-REIT
Wanda’s wealth management product will offer investors annual returns of around 6 percent, according to the Journal’s account. The company also said that, as part of its asset-light strategy, it plans to sell off its malls after 5-7 years when rental income has stabilised, and holders of the wealth management product could share in any resulting profits.
Wang is said to have compared the investment product to a real estate investment trust, a property investment vehicle that is not yet available to retail investors in China and is still in trial stages for institutional investors.
“Wanda’s wealth management product is like a REIT,” the Journal quoted Wang as saying. “If investors are in urgent need of cash and need to exit the investment, we have spoken to (authorities in) two financial reform trial zones to set up a title transaction platform.”
The investment product will be marketed to individuals via Wanda’s own e-commerce and electronic payment subsidiaries. The company bought online payment firm 99bill.com in December last year and earlier this month rolled out its own e-commerce site, Ffan.com, in cooperation with online giants Tencent and Baidu.
Growing Ten-Fold in a Decade
Wanda will need all the cash that China’s investment-hungry netizens can provide if it is going to meet its target of opening 900 new malls in the next decade. The company opened its 100th mall in November last year, and Wang says that Wanda will open 26 more this year.
Now, according to an article in Reuters, the developer plans to pick up the pace and open at least 50 new Wanda Plaza malls each year starting from 2016. Wanda’s fleet of new malls, which the company says will be primarily in third and fourth tier cities, should reach 400-500 by 2020 and 1000 by 2025, if Wang’s vision is realised.
In January of this year Wanda announced that it had raised RMB 24 billion ($3.88 billion) from four domestic investors to fund 20 new shopping malls in China – the first time that the company had taken outside investment to support its expansion.
Looking for Fresh Funding Under the New Normal
Whatever the retail opportunities in China’s smaller cities may be, most analysts believe the housing market in these lower-tiers looks much more challenging. And this pessimistic outlook in the residential sector is what’s driving Wanda to look for new ways to fund its projects (or “go asset light” depending on which angle on the story you prefer).
China’s housing industry has been mired in a slump for more than a year now, and while a recovery is expected in the coming months, most analysts agree that the sector’s boom years are over. In the third and fourth-tier cities, where overall economic growth prospects look less favorable and stockpiles of unsold homes are larger, the downturn is likely to drag on much longer.
With China’s real estate sector confronting a “new normal” of slower sales and less demand, developers like Wanda and Greenland Group are finding that their traditional funding model of bank loans and aggressive pre-sales of projects to pay off those loans don’t work as well as they used to.
Wanda, even if it rents out the retail space in its Wanda Plazas, is known for building its malls as part of larger mixed-use complexes that include residential space. And the sales of these homes has been the kindling that enabled it to borrow money short-term from banks to fund its building blitzkrieg of 100 malls since it entered the commercial property industry in 2000.
Now, with even more ambitious expansion plans in the works, Wanda’s traditional financing scheme is likely to prove inadequate.
Luckily, there’s the Internet.
Online Financing for Offline Projects
Greenland Group, which primarily markets residential properties, rolled out its first online financing vehicle earlier this month and was able to raise RMB 200 million ($32 million) in just 30 minutes.
Greenland’s wealth management product capitalised on consumer dissatisfaction with low-interest savings accounts and public confidence in property as an investment to provide the company with financing that it could no longer obtain from banks or pre-sales of homes.
Now Wanda hopes to follow suit with its own online investment product. Wang said that the new financing initiative is part of an overall shift by the company to become a service provider, like a hotel management company, rather than simply a builder of real estate.