The new season of M&A business in the real estate industry started, while real estate enterprises in the field are no longer the leading role. “Project packaging and selling”-oriented private funds are entering the M&A field in “an accelerated speed”.

Per the latest research report of ZERO2IPO Research Center, there were 21 private real estate funds in China in the 3Q with $1.935b, which surpassed the 14 funds with $1.528b raised in the 1Q and 2Q of this year. Among the 21 funds, a total of 16 M&A funds has had completed with $0.62b.

In Chongqing, the second season of private real estate funds is coming. “During the past two years, the investment method of stock-equity combination is mostly adopted for private funds. Currently, people are facing the issue of transformation to M&A fund.”

Yesterday, when managers of several local private funds were interviewed by our journalist, they believed that the market fragmentation phenomenon was severe, some medium and small-sized real estate enterprises were selling their projects at a discount, and the conditions created the environment for the showing of M&A funds. It is generally believed by abovementioned private fund managers that M&A funds will be collectively established in the early of next year in Chongqing.

Individual Case—Funds Buy “Semi-finished Products” with 50% Reduction

“Among stock and equity combined funds, the private sector plays a role of risk control person, considering whether other parties involved can return funds on schedule; as a leading role concerning M&A, private sector concerns about whether a project can be repackaged and whether a packaged project can fetch a good price.” Chen Haoyu, the general manager of the Chongqing Branch of Richlink Capital (the private fund firstly entering real estate industry in China) is experiencing the transformation course from a risk control person to an M&A leading person.

“Since Richlink Capital entered Chongqing in 2013, we have issued several private funds and I have read more than a hundred projects. We are transferring to M&A funds in real estate projects, but the standard changed.” For Chen Haoyu, whether they can find a good project is the first step for a successful M&A case. Therefore, since March of this year, Chan Haoyu has been travelling between the major city of Chongqing and various districts and counties. After running around for above half a year, Chen Haoyu has selected 20 reserve projects for M&A fund of the company.

“When selecting a project for debt fund, assets of a real estate enterprise, including house properties and lands, are mainly investigated. To select a project for M&A fund, we shall investigate more contents with more strict standards.” Chen Haoyu told the journalist that Richlink Capital has established three important standards for M&A project. Firstly, the real estate enterprise shall have achieved a preselling license, which guarantees that the project can be released within 1 year; Secondly, the self-owned capital of the real estate enterprise shall account for over 40%, which guarantees relatively clear stock rights of the project; Thirdly, movement of capital can be comprehensively monitored after the introduction of the M&A fund.

At the latest, Richlink Capital will release its first real estate M&A fund in Chongqing early next year, and the investment projects of the fund are from the abovementioned project pool. “The project is a semi-finished house project in the districts and counties, including two commercial types (dwelling houses and commercial houses). Our price equals to half of the average price of surrounding projects.” Chen Haoyu told the journalist that, when finding projects, the company also organized a special management team for later package and marketing.

Trend— Leading Real Estate Enterprises Compete for M&A Private Sector

Same as Chen Haoyu, He Xiao, who is responsible for construction of private marketing channel, is experiencing role transformation. “In 2005, I quitted from the financial industry and worked on PE (venture investment) for the earliest period.” He Xiao told the journalist, GEM (growth enterprise market) went through a stage from rapid rising to slump from October 2009 to the end of 2011, while He Xiao also witnessed a tide fall of “general PE”; in 2012, He Xiao entered a China’s large-scale private fund and worked as the project director of real estate private sector after the falling tide of PE.

“From 2012 to 2013”, real estate private sector also experienced an explosive growth. As the investment method of stock-equity combination was majorly adopted, the private sector solved the financing issue of real estate enterprises within a short term, but reduced their profit margin.” He Xiao told the journalist that, under the condition of depressed real estate industry in China, real estate enterprises no longer raised fund for under-way projects in a blind way, and investors were more prudent for the real estate industry. Therefore, the private real estate sector was caught in a dilemma of capital-raising and investment.

“The only exception is M&A fund. Real estate enterprises with financial strain and old funds entering an exit period both have lots of projects to be sold.” He Xiao said that funds in urgent exit period often sold their projects at a discount. “In a first or second tier city, projects being sold with forty or fifty percent off are not rare; and ‘cheap commodities’ being sold with 60% off can even be seen in a third or fourth tier city.” He Xiao told the journalist that, his private branch had completed four investigations in Chongqing during the second half of the year and would release its first M&A fund in Chongqing next year at the latest.

“Although Chongqing is a first-tier city, competition in Beijing, Shanghai, Guangzhou and other districts is fiercer. In addition to China’s large-scale private funds, listed real estate enterprises also aim at the market.” He Xiao said that leading and listed real estate enterprises had ready management teams and marketing channels and, undoubtedly, had higher strengths for “bargain-hunting” than the private sector if they had sufficient capital.

Per Wind data, a total of 73 M&A transactions in real estate industry were completed with a total value of 15.293 billion CNY in the first half of this year, showing a year-on-year growth of 2.09 times; there were 92 uncompleted transactions with a total amount of 160.962 billion CNY, showing a year-on-year growth of 4.37 times. Usually, the amount and transaction amount of M&A cases within real estate industry are higher than that in the sector of private fund.

Therefore, similar as He Xiao’s company, JD Capital, Grand China Fund and other first-line private enlisting companies all turned their focus to Chongqing and other Midwest cities with relatively less competition. “During the second half of this year, we encountered a significantly higher amount of non-local private sector companies when we were conducting the investigations.” A lot of M&A funds will be collectively established in next year.” Although Richlink Capital entered the M&A market in Chongqing in advance, Chen Haoyu, the manager of Richlink Capital also suffered high pressure.

Bottle Neck—Funds Face the Challenge of “Easy Buying and Difficult Selling”.

There is a saying within the industry that the real estate sector is divided into three parts—1/3 enterprises will suffer M&A, 1/3 will survive under “struggling”, and 1/3 enterprises will be stronger. “There are lots of projects with rational prices, but how to sell a project after buying it is the key challenge for a fund.” In the eyes of Chen Haoyu, M&A is a market with relatively high threshold; managers of private sector shall know how to select and package a project and have smooth marketing channels. “For a dwelling real estate project, marketing would not be a concern if its price is lower than its surround houses; while more factors shall be considered for a commercial real estate project.” Chen Haoyu said that, without good lease outcomes, a private fund would fail to collect returned money and would be unable to explain to its investors.

Different from Chen Haoyu’s case, another M&A fund gave up project because it failed to find a proper “manager”. Zhang Yi is a manager of a local private fund company in Chongqing, and gave up a project to a nonlocal company last month. “The position is good and the price is low. But we don’t have the ability to package the real estate and could not find a proper third party for joint investment and management.” Zhang Yi said that, although “coveted” the project, he had to “give up the project to others”.

Exploration -- “Large-scale M&A Show” in the Stock Age

“In 2014, real estate industry showed a subtle conversion, and differentiation of tendency was shown in different districts. In this year, the capital raising and investment sector in China’s private real estate market showed a sharp decline than 2013.” When being interviewed by our journalist, Li Yujia, a senior researcher of Shenzhen Real Estate Research Center, claimed that the real estate private fund-raising sector, which was hot during previous years, was facing “shuffle”, and some substantial real estate funds started to explore M&A pattern.

“Currently, the real estate sector is entering a stock age. The annual increment can barely surpass the peak value of 2013, but the stock reaches record high repeatedly; development-oriented funds are facing restrictions, appreciation-oriented funds are at the opportune moment, and M&A transactions with appreciation in asset value can realize excess earnings.” TOPINA Capital-TIANCHAO Real Estate M&A Fund was officially issued on October 14. Chen Yifeng, the chairman of the board of TOPINA Capital, believed that the profit gained by real estate M&A was higher than pure financing for real estate enterprises and the former realized an annual yield of 30%-40%.

“The shortage of mobility will certainly hasten the generation of three “dilemmas”—dilemma capitals, dilemma projects and dilemma enterprises. The three ‘dilemmas’ will lead to substantial transaction opportunities of buying high-quality assets at a discount.” Chen Yifeng believed that a “large-scale M&A show” is officially on, which provided a direction and opportunity for transformation of real estate funds.

How to Screen an M&A Fund?

Xu Zhiqiang, the chairman of the board of United Capital, provides some recommendations to investors. The first aspect to be considered is the object district, section and usage as well as surrounding commercial activities and current conditions of rental and sales of a fund. The second aspect to be considered is the performances of the management party of the fund and the project party. Chen Yifeng, the chairman of the board of TOPINA Capital, presents two factors for assessment. Firstly, are there issues to be concerned about risk exposure regarding the transaction of the M&A fund? Secondly, an M&A often stands for a short-term transaction. If the risk window can be well settled, the distribution of earnings would be relatively fair. Other relevant dimensions are same as general funds, and the abovementioned two factors are worthy of special attention.