China’s largest real estate developers, China Vanke and Dalian Wanda Group, operate at a scale that makes New York’s giants look small.
Wanda’s assets in 2014 totaled $85.6 billion, according to the company’s website, with a portfolio of more than 225 million square feet. Meanwhile, Vanke’s assets totaled $82 billion, with a portfolio of 410 million square feet according to Fitch. Last month, the two firms announced an alliance that industry experts told The Real Deal could eventually have a significant impact on their international activity, especially in global hubs like New York City.
“It would not be one small building here, one small building there,” said Vincent Mo, CEO of SouFun Holdings, one of the largest internet real estate portals in China. Representatives for Wanda declined to comment for this story, while representatives for Vanke didn’t respond to several requests for comment.
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Both firms are among China’s most successful companies. Wanda’s revenue hit $38.8 billion in 2014, while Vanke’s was $23.6 billion, with $34.7 billion in sales (Vanke only counts sales as revenue when development is completed). Wang Jianlin, Wanda’s chair and founder, is Asia’s richest man, with an estimated fortune of more than $35 billion.
Still, both companies have felt the effects of a slumping Chinese housing market. Vanke’s first-quarter net profit fell nearly 60 percent year-over-year in 2015, to $105 million. Wanda reported an annual net profit of $2.1 billion in 2014, up 14 percent over 2013, despite narrower margins from sales, on the strength of its leasing and management business, according to a press release. The company does not issue quarterly reports.
“The old model was: ‘If you build it, they will come.’ That model is played out,” said Patrick Chovanec, chief strategist at investment advisor Silvercrest Asset Management and a prominent commentator on the Chinese economy.
In the past year, both Vanke and Wanda announced they were shifting to an “asset-light” strategy, and will seek outside capital for land purchases while focusing on rental income and management services.
“They’re not growing as quickly. The cash flow from sales that’s needed to cover the investments in the property is very high. They want to get away from having to put a huge amount of capital into every project,” said Su Aik Lim, director of Asia Pacific Corporates at Fitch Ratings.
Lim described the new strategy as “asset-lighter.” While cash flow still funds the bulk of Wanda and Vanke’s business, both firms have also deployed REIT-like securitized loans, and both are looking to get into crowdfunding.
“There is such a wave among Chinese companies which is also encouraged by the Chinese government,” said SouFun’s Mo, who has worked with both companies for years.
The companies’ partnership will allow them to pool capital and spread risk, Lim said, while also allowing them to share their expertise and investor network.
So far, Vanke and Wanda’s asset-light strategy is focused within China, Lim said. Abroad, “they’re still investing quite heavily on their own.”
Since 2013, Vanke bought six major properties outside China, according to Real Capital Analytics: in Singapore, Hong Kong, and two each in San Francisco and New York. Here, it paid $125 million for a controlling stake in the 30-story Bryant Park office building known as Bush Tower, and bought into Aby Rosen’s 100 East 53rd Street, a Norman Foster-designed condo project. On both its San Francisco projects, it teamed up with Tishman Speyer.
Wanda owns seven properties outside China, according to Real Capital data: in London, Madrid, Los Angeles, Chicago, and Sydney.
Wanda is also active in other industries. It owns the British yacht maker Sunseeker, the Swiss sports marketer Infront Sports & Media, and AMC Theaters, the largest theatre chain in the U.S.
Going big in the Big Apple
New York is “definitively one of the important markets'” for both companies, said Mo, who’s worked with both companies for years.
In 2013, Jianlin announced Wanda was in talks with potential partners to build a luxury hotel and an adjacent apartment building in Manhattan, according to Reuters. That deal never panned out.
A project in Sydney that did come to pass, however, offers insight into the firm’s approach.
This January, Wanda bought a pair of adjacent buildings near the Sydney Opera House for a combined $383 million. Wanda said it is investing about $1 billion to build a five-star, 160-room hotel with accompanying luxury apartments and retail space.
Wanda’s luxury hotel and apartments project in London, at One Nine Elms, purchased in 2013, followed the same prime-location, luxury-mixed-use blueprint.
Wanda and Vanke “have been disciplined,” said Borja Sierra, U.S. head of capital markets at Savills Studley. “They’ve said no to a lot of opportunities. They don’t only want to have an asset. They want to buy the right place.”
Still, there’s plenty of reason to remain skeptical. Several experts highlighted the relatively small profile of overseas properties on both firms’ balance sheets. They own a combined 13 real estate properties outside China, while at home, Vanke owns 367 properties and Wanda 244, according to Real Capital data.
The companies also have a different mission abroad than they do at home.
“They see their investors going abroad, and they follow,” said Silvercrest’s Chovanec. “The government is telling everyone to go global, [and they think] ‘we’ll go global too.’”
In the short-term, Vanke and Wanda will continue to team up with local partners on their international investment, Mo predicts. “They’re accumulating experience,” he said, and “will not try to do everything themselves.”
And outside China, other barriers could make it tough for them to operate at the scale they are accustomed to.
“In other markets it’s not so easy to develop megaprojects,” said Omer Ozden, a managing partner at Beijing Capital Equity and former executive director of acquisitions for Xinyuan Real Estate. “It depends on the type of economy, the type of political system.”
Moreover, the two giants have different business objectives. Wanda is focused on hospitality in major tourist centers, and is “interested in taking advantage of their brand in places where their customers — especially their Chinese customers — want to visit,” Ozden said. In contrast, Vanke is focused on “places Chinese want to live or own property.”
There’s every reason to think both companies’ international moves will continue. Chinese investors spent $3 billion on New York properties in 2014, and experts predict that 2015 activity will dwarf that figure. And as the slump back home continues, the companies will eye greater rewards abroad.
And if they do join forces, Sierra believes there’s much more to come. “They’re great companies with great teams in the U.S.,” he said. “If they were powerful before, now they’ll be super-powerful.”