Property developers team up with investment firms
Updated: 2007-09-17 14:24
While listed real estate firms often raise money from the capital market, unlisted firms could use stake cooperation with partners as an alternative option, especially for large-scale projects with limited starting capital.
A good example of this is China Central Place, a landmark complex in Beijing's Central Business District (CBD) that will be completed on September 25. The investment of the project totaled more than 78 billion yuan, but the registered capital of Guohua Real Estate, developer of the property, is only 350 million yuan.
Guohua had to complete the project with limited registered capital, and it had to ensure the necessary cash flow while maintaining a low debt ratio.
The solutions to these challenges came from its successful stake cooperation with Surapan Investment Company, Japanese real estate fund Re-plus and department store Shin Kong Mitsukoshi.
Covering more than 15 hectares, China Central Place contains 1 million square meters of real estate, including three office buildings, two luxury hotels, Shin Kong Place and international apartments.
Construction began on May 28, 2003, with the apartment sector finished first. Guohua soon after got part of the investment back by selling the apartments.
And in order to bring in the world's top hotels, Guohua teamed up with the Thailand-based Surapan Investment Company.
"It usually takes 15 years, or even more, to pull back the investment on hotels. Therefore, having two of the world's leading hotels with us really is a big challenge to our cash flow and would be an unrealistic move for some industry insiders," says Fang Chao, chairman of Guohua Real Estate. "But I firmly believe the presence of Ritz-Carlton and JW Marriott can largely boost the overall quality of the whole project."
Guohua's cooperation with Surapan resolved the capital bottleneck. They jointly set up Beijing Huamao Surapan Hotels Development Co Ltd, in which Surlapan's registered capital of 450 million yuan gives it the controlling stake.
In addition, the company got enough loans from the bank to ensure the construction of those two top hotels went smoothly - that is, until Guohua came across another cash flow problem.
"To ensure the consistent style and quality of the office buildings, we decided to put them on lease rather than sell them, although the latter is a quick way to get money back," Fang says. "To ease the tightened cash flow, we talked with a number of international real estate funds and finally choose Re-plus."
According to the deal, Guohua sold 124.000 square meters of office buildings to Re-plus for 2.8 billion yuan, but Re-plus could not sell them for 20 years. And Guohua still maintains a 60 percent stake of the whole office building block.
"The cooperation with Re-plus not only addresses our capital problem, but also helps to spread around market risks," Fang added.
Guohua retained ownership of the shopping mall but offered management rights to Shin Kong Mitsukoshi.
The turnover of Shin Kong Place has exceeded expectations, maintaining an average monthly growth of at least 12 percent.