Mainland property giant China Vanke and Singapore-based hotel and resort operator Banyan Tree Holdings are dissolving a six-year-old China hospitality joint venture after failing to gain traction in a challenging mainland market.
Banyan Tree has entered into a term sheet with Vanke to acquire the 60 percent stake it does not already own in the two entities that manage the joint venture’s hotels and resorts in mainland China for a total consideration of RMB 480 million ($67 million), according to a regulatory filing on Friday.
In a parallel transaction, Vanke is buying out Banyan Tree’s 5.2 percent interest in Banyan Tree Assets (China) Holdings JV, which owns the JV’s mainland hotels, for RMB 30 million ($4.2 million), officially ending a partnership set up in 2017.
“[Exiting the JV allows] us to capitalise on the growth opportunities within the region and strengthen our position as a key player in the hospitality industry,” Banyan Tree said in the statement. “It will enable the company to streamline strategic decision-making in response to market dynamics and enhance operational efficiency in day-to-day operations.”
Going Asset Light
Under the agreement, Banyan Tree will pay RMB 425 million in cash to buy out the remaining shares in Banyan Tree Services and Banyan Tree Hotel Management, held by Vanke’s China Voyage entity (20 percent) and Banyan Tree Assets (40 percent).
The two entities, which provide management and ancillary services to hotels and resorts in China, will be fully owned by the SGX-listed firm after the sale.
The Singapore firm plans to offset the remaining RMB 55 million in consideration against the proceeds of the sale of its Banyan Tree Assets shares to Vanke, including receivables.
Banyan Tree said letting go of the hotel ownership component of the partnership aligns with its shift to an asset-light strategy. In an interview earlier this year, Banyan Tree founder Ho Kwon Ping said that within the next five years, managed hotels will make up 90 percent of the operator’s portfolio, up from 34 percent in 2009, while owned hotels will be just 10 percent, down from 66 percent in 2009.
The partners set up the JV in January 2017 to jointly own, manage and grow Banyan Tree’s chain of resorts and hotels across mainland China. At the time that it was formed, the JV had S$100 million (now $74 million) in net tangible assets with the two partners holding half stakes each.
In addition to Banyan Tree’s 15 assets in China at that time, Vanke initially planned to bring Banyan Tree hotels to some of its mixed-use urban developments in the country, and even inject its own hotels into the JV. The fruits of that planned expansion are now hard to discern, with analysts indicating that no new assets have been added to the venture’s portfolio since it was established.
At the time of publication, Banyan Tree had not yet responded to media inquiries regarding the joint venture’s recent milestones and the current status of its holdings. Vanke also had not responded to inquiries and did not issue a statement regarding the transaction.
Definitive agreements for the transaction are expected to be finalised on or before 8 January, 30 days from the date of the term sheet, according to Banyan Tree.
Unfavourable market conditions may have forced the partners to dissolve the JV and focus on their core businesses instead, according to Dan Voellm, chief executive and founder of hotel consultancy AP Hospitality Advisors.
“The JV did not have much traction since inception. As such it was a costly vehicle to hold the properties in,” said Voellm, who was not involved in the deal. “Evidently, the current market environment and recent trend in the real estate industry makes it very difficult for the JV to realize its objectives.”
The veteran hotel consultant expects that Banyan Tree could gain more flexibility and achieve greater efficiency in operating its Chinese hotels and resorts, after buying back the asset management units.
Banyan Tree booked a comprehensive loss of THB 10.2 million ($290,000) from its investments in the Banyan Tree China JV, in the nine months from January to September, with that deficit having widened from THB 735,000 in the same period last year, based on its latest business update on 14 November.
There were 22 resorts and 22 spas operated under the Banyan Tree brand in China at the end of 2022, according to the company’s annual report. The firm expanded its presence in the country with the opening of at least four new projects totalling 478 keys this year.
For Vanke, Voellm sees the state-backed developer gaining a future opportunity to buttress its balance sheet.
“Potentially in the very long run a C-REIT (China real estate investment trust) could become a similar exit vehicle as the JV was intended to be,” he added. “However, such a scenario is likely still years away and small luxury resorts may not be suitable to inject altogether.”
Ranked as China’s second largest developer by sales in 2022, Vanke last month saw Moody’s Investors Service downgrade its credit to junk as its sales continued to slide at the same time that the company’s access to funding remains limited.
In the first 10 months of this year, Vanke saw its contracted sales drop 10 percent compared to the same period in 2022 to RMB 312.4 billion, a trend that Moody’s expects will continue through next year.