(Yicai Global) March 13 -- China Young Professionals Apartment Management Ltd. (CYPA), a Beijing-based apartment investment and management company, will team up with China Construction Bank (CCB) to jointly pool an industrial merger and acquisition fund to buy property in major cities and cooperate with developers to customize long-term apartment rentals.
This M&A fund worth CNY2 billion (USD315.0 million) will be the first of its kind oriented to long-term apartment rental, said Wang Gehong, head of the CCB Shenzhen branch and founder of CYPA.
The fund will be based in Qianhai, Shenzhen in China’s southeastern Guangdong province with an initial scale of CNY2 billion, Wang told Yicai Global. This fund will grow per demand for M&As, and its final value will depend on projects.
CCB will contribute 50 percent. Secondary investors include Kylin Investment Funds PLC, Bohai Securities Co. and Bohai Huijin Securities Asset Management Co.
“The framework for this fund has been established, but it is still undergoing founding procedures, and its interest rate has not been decided yet,” Wang told Yicai Global.
As the first bank to enter the house rental market, CCB established wh.jiayuan.home.ccb.com last year, setting up a housing rental platform in tandem with developers to publicize data on thousands of homes. The bank also finances construction of long-term rental apartments.
External M&A is a shortcut for leasing companies seeking to expand their scales as soon as possible. Increased corporate scale also means an expanded basis for rentals and dilution of fixed costs, leading to increased profit.
“It will be quite hard to form a good business model if we cannot shape a business chain of acquisition-holding-operating-withdrawal by leveraging,” Wang said.
The long-term rental industry has thus far no clear profit model, but many market players believe low rental apartment land prices will raise the rate of return and shorten the payback period. After assets form a stable capital flow from rental, operators can recover their cost by asset securitizations.
CYPA plans to acquire assets through this M&A fund based on this logic. “I am optimistic about China’s public REITs [real estate investment trusts], yet the asset securitization needs to be backed by asset packages of certain scales," Wang told Yicai Global. "The preliminary acquisition of asset packages needs massive fund support at a lower cost,” he added.
“The competition pattern in the era of long-term rental apartments will be gradually fixed in the second half of 2018. By that time, those gaining the upper hand will be major capitals, major players and those able to survive in the competition pattern,” Yu Ting, a senior observer in the long-term rental apartment market told Yicai Global. Many small-sized operators also expect to share a part in the market, aided by financial institutions.