China’s largest developer by sales took a major step toward transforming its business model last week when Vanke signed a memorandum of understanding to sell a nine of its commercial real estate projects to Carlyle Group.
The deal between China Vanke and the US private equity giant was first reported last week and confirmed in a stock market announcement by the developer on Friday. Vanke has been saying for some months that it plans to change its business model in favor of a more “asset light” strategy as the growth of China’s real estate slows.
Under the terms of the agreement the two companies will form an “asset platform” with Carlyle holding an 80 percent stake in the new venture, and Vanke maintaining 20 percent. The companies will also cooperate on the management of the properties through a separate cooperative venture.
The announcement did not reveal the financial terms of the agreement, but earlier reports had placed the value of the transaction at between RMB 6 billion to RMB 10 billion ($977 million to $1.62 billion), with different sources citing different values.
Analysts Endorse Vanke’s New Approach
Even before Vanke’s announcement credit agency Fitch Ratings had praised what it called in an August 19th report the company’s “superior management and asset turnover” in the face of a downturn. Fitch noted that, “Its leverage and acquisition strategy distinguishes Vanke from some other Chinese developers who are over-aggressive in pursuing business scale.”
Seeming to anticipate a move such as the venture with Carlyle the ratings agency said that it “does not expect Vanke’s asset-light business model and high competition in the Chinese homebuilding market – which results in lower margins – to hurt its status as a Chinese homebuilder with one of the highest standalone ratings in the sector.”
Earlier this year Vanke had already announced a tie-up with Blackstone to pursue opportunities in China’s logistics sector. Also, in the company’s development projects in the US, which include a joint venture with Tishman Speyer in San Francisco and a three-way venture in New York, it has been careful to balance financial commitments across partnerships.
Assets Said to Be Retail Malls
In reports published last week the assets involved in the Carlyle acquisition were said to be nine shopping malls, however, Vanke has yet to confirm this. The developer opened its first Vanke Plaza shopping mall in Beijing last December and in June announced plans to open at least 20 retail centres across China.
Vanke made its fortune building homes for China’s middle class, but has been diversifying in recent years as the country’s real estate market has slowed down.