Property firm stands out from crowd

Chinese premier Li keqiang has endorsed 'equity crowdfunding', catching the public's attention

Crowdfunding has taken on a whole new meaning in China. When it first became popular in the United States and Europe in 2003, it centered around small startup companies looking to raise money by enticing a few hundred investors.

But in China crowdfunding has reached a different level with the country's leading commercial real estate player using the investment model to finance multibillion-yuan construction projects.

On June 12, Dalian Wanda Group Co Ltd generated an online buzz when it invited small investors to put their hard-earned cash into the construction of five shopping malls.

"Large scale crowdfunded projects around the world have brought in millions (of dollars), but a project on this scale is decidedly rare," Wanda said in a statement. "For a product to launch and sell out so quickly is quite a feat."

Rolled out on the 99Bill.com website, in which Wanda owns a controlling stake, the company raised 5 billion yuan ($806 million) in just three days, with 100 million yuan pouring in during the first 50 minutes. Institutional investors also scrambled to get in on the act.

"We named the product Stable Earner No 1 because that is what it is," says Wanda, which reported an 18 percent growth in first half revenue this year compared to the same period in 2014. "The funds raised will be invested in a real company and will be exclusively used in construction operations for Wanda Plazas."

The key to the company's crowdfunding success was simple.

Small investors were allowed to take a stake in the company's latest projects for as little as 1,000 yuan or as much as 1 million yuan, generating an annual return of around 12 percent.

That is considerably more than the 2.25 percent offered by traditional banks for a one-year deposit account or 5 percent by wealth management funds.

Small investors are also financing the "Wanda Plaza" brand, which is considered a safe option after the turmoil that has engulfed China's stock markets.

"We offer stable returns," the company says. "Under Wanda Group's strong brand appeal, the annual occupancy rates and rental collection rates from its commercial real estate business average more than 99 percent. This is enough to ensure that investors can obtain a stable annualized rate of return."

Pitching the minimum investment as low as 1,000 yuan has been crucial in generating the sort of excitement that Wanda was looking for.

To illustrate the point, another online financing product launched by Greenland Holding Group Co Ltd, one of the country's property giants, required a 20,000 yuan minimum investment.

"Still, the Internet can help developers collect money in an efficient way," Zhu Mingchun, the Beijing-based co-founder of research firm Yingcan Group, told Bloomberg.

"Compared with individual investors, banks are stricter with lending when it comes to developers because the market has yet to recover."

Crowdfunding has become a global phenomenon. Last year, it raised $16.2 billion worldwide, a jump of 167 percent compared to $6.1 billion in 2013, according to a report released by Massolution, a research company specializing in the industry and based in the US. Growth in Asia surged by 320 percent to $3.4 billion, compared to 2013. "This year, we are forecasting that worldwide crowdfunding volumes will more than double again to reach $34.4 billion," Carl Esposti, CEO of Massolution, says.

In China, there are no crowdfunding figures available, but the online financing industry is expected to triple this year to more than 350 billion yuan compared to 2013, analysts have reported.

"China has the biggest online population in the world and people are eager to find new channels of finance," Li Yingying, a venture capital fund consultant, told The Straits Times, the Singapore-based newspaper.

As for Wanda's crowdfunding scheme, the 5 billion yuan raised will be just part of the finance required to build the five shopping centers. But the move is part of a plan to transform the group into a property management company that relies on outside investors to fund major building projects.

"A closer look at the crowdfunding project shows some interesting points," Jin Yu, founder of Dianxindai.com, a property peer-to-peer lending platform, says. "The investors are not taking a share in Wanda Group, so they are not entitled to dividend payments like equity holders."

Wanda put it a different way, describing the scheme as an "innovation in crowdfunding". Investors receive 6 percent on their return from annual rents collected from retail outlets at shopping malls.

The other 6 percent can take between three years and seven years after the project is listed on the Shanghai Stock Ex-change or sold to an investment group. If that does not happen, the company has promised to pay back the original investment with a 50 percent bonus after seven years, which will translate into an annualized rate of between 12 percent and 20 percent.

"Equity crowdfunding" may become the next big trend after being endorsed by Premier Li Keqiang last year in a move to increase innovation and entrepreneurial ventures.

"In China, crowdfunding is not really that different from P2P lending," Fu Yichen, an analyst with China Real Estate Information Corp, says. "In the name of equity financing, developers are doing direct debt financing."

Sun Hongsheng, chief executive officer of Zhongchou.com, one of the first crowdfunding websites in China, stresses that there are many different aspects in property investment models from traditional crowdfunding in the US and Europe.

"Investors can participate in a project simply to receive a financial return," Sun says. "They can also get special deals from retailers, win prizes or a combination of all three."

A scheme on his website, launched by resort hotel group Ammo in Sanya, plans to raise 10 million yuan through crowdfunding.

Investors will not only get a financial return from the business operation, they will also receive coupons, which they can spend at the group's chain of hotels. Prizes such as a box of chocolates or dinner for two are other incentives.

Another crowdfunding project set up by Zhongchou.com and Vantone Real Estate, a major Chinese developer, allows investors to buy customized apartments. These are developed by Vantone at a discount price, which has yet to be released. "Even so, many small developers see crowdfunding as a marketing tool that will help them sell unsold properties," Sun says. "To prevent risks, we only cooperated with a few state-owned, big-name developers."

There are other concerns as well. China's Corporate Law and Securities Law has a 200-shareholder ceiling before a project is considered to be an initial public offering or IPO. That, of course, has to be approved and supervised by the China Securities Regulatory Commission.

Even with fewer than 200 investors, there are still legal implications.

Known as "private placement", which is the opposite of an IPO, there are regulations governing the net assets of investors and how much they can invest in a project. This goes against the whole ethos of crowdfunding, which can involve thousands of investors from all walks of life.

Zhao Yanchun, a lawyer from Allbright Law Offices, is convinced the regulations should be changed for "equity crowdfunding" to allow small investors to take part. He also believes that tougher disclosure measures for companies would reduce the risk factor.

"Online information disclosure by companies is not up to standard," Zhao says. "Company valuations are rarely backed by a trusted third party."

Despite the challenges ahead, crowdfunding looks here to stay. "The China market alone could represent $48 billion in crowdfunding by 2020, if the country liberalizes its law to allow more equity funding," says Richard Swart, a global alternative finance researcher at the University of California, Berkeley, Haas School of Business.

zhengyangpeng@chinadaily.com.cn

(China Daily Africa Weekly 07/24/2015 page23)