China property giants join hands in tough market

China's two biggest property companies are joining forces to buy land and develop new projects, the latest sign of how the real estate industry is adapting to the end of a housing market boom.

China Vanke, the country's largest homebuilder by revenue, and Dalian Wanda, owner of China's top commercial developer, on Thursday announced a "strategic co-operation agreement" that will cover both domestic and international markets.

"This alliance between two prominent real estate players spearheads a new direction for the domestic real estate industry," they said in a joint statement.

As the multiyear boom in China's property market has come to an end, developers have started to shift away from simply building and selling property towards business models based on income from rental and property management services.

Wanda said earlier this year it was moving to an "asset-light" model that involves using outside investor capital to fund projects rather than its own balance sheet.

Some builders also have sought to diversify away from property altogether. Evergrande announced plans last year to invest in agriculture, while Wanda set up a joint venture with two of China's biggest internet companies to create an online-to-offline sales platform.

While both Vanke and Wanda are investing heavily overseas, the two have little overlap inside China.

Wanda's commercial property arm, which raised $3.7bn from a Hong Kong flotation in December, has largely focused on office and retail development inside China, although it is building apartment blocks in London's Nine Elms district.

The acquisitive Wanda parent company, founded by billionaire Wang Jianlin, has also targeted the entertainment sector, including the purchase of cinema chain AMC in 2012.

Vanke's principle business is residential development, where it has the largest market share in China. Last year alone it sold 210,000 units, helping make it the biggest developer in the world by revenue.

"The two companies have extremely wide scope for co-operation, including joint acquisition of land, asset-light operation, financial innovation and offline retail within residential compounds," Yan Changming, property analyst at Industrial Securities, wrote in a report.

They "don't have much competition in their core business lines. This tie-up allows each to benefit from the other's strength."

China's housing market has begun to show some signs of stabilising, after having slumped for more than a year. Sales rose 16 per cent annually in April in value terms, according to data this week, only the second month of annual gains since November 2013.

However, margins at many property developers are under pressure amid the scramble to cut prices in an effort to shift inventory. Vanke's net profit fell 58 per cent in the first quarter and revenue dropped 6 per cent.

Hong Kong-listed shares in Wanda Commercial Properties rose 2.8 per cent following Thursday's announcement, while Vanke rose 1.3 per cent.

Wanda Hotel Development, also listed in Hong Kong, jumped more than 10 per cent, prompting the company to issue a statement saying it was unaware of any reason for such "unusual price and trading volume movements".

Additional reporting by Gabriel Wildau in Shanghai

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