SHANGHAI -- For two decades they have been the northern and southern giants of China’s real estate market – two companies with similar names (in Chinese, both begin with the character 'wan'), one based in Beijing, the other in the southern boomtown of Shenzhen, both riding China’s stunning real estate boom to make their owners billionaires.

Now shopping mall giant (Dalian) Wanda, owned by China’s richest man Wang Jianlin, and Vanke, the world’s biggest residential real estate developer, founded by the mountaineering-loving Wang Shi, have “stunned the capital markets,” in the words of Chinese news site The Paper, by announcing a “strategic partnership.”

Observers said the move was a response to slowing sales growth and reduced profit margins in China’s property sector over the past two years, as the government has taken steps to cool the market amid fears of a bubble. A general slowdown in growth has also taken its toll: While the two companies remain hugely wealthy, with Wanda’s sales last year at around $39 billion and Vanke’s approximately $34 billion, Vanke’s profits in the first quarter of this year were sharply down on a year earlier.

In a statement, Vanke said the partnership would “significantly raise the operational efficiency and lower operational costs to create bigger value for both companies," while Wang Jianlin, in a separate statement, said that with demand slowing, Chinese developers needed a “new line of thinking and a new model.” 

The deal is not a full merger – Wang’s statement stressed there would be no “reshuffle” in the companies' respective leadership teams – but the two firms will jointly set up a new company to acquire land and develop future projects, and may also bring some existing projects together.

Analysts said there were “significant synergies” between the two companies. While they both operate in 48 of the same cities around China, in recent years Wanda has focused on building its Wanda Plazas, which include office space, shopping malls and some residential property. (It currently has 109 of these but has vowed to build 1000 across China in the next decade.) Vanke has some  commercial properties but is still best known for its mass-market but well-designed, residential compounds.

According to an analyst quoted by The Paper, Wanda will now no longer get involved in residential property, while Vanke CEO Yu Liang said the firm’s future commercial projects would be “community”-based. Barrons Asia said the companies were likely to jointly develop mixed-use projects, with Vanke focusing on homes and offices, and Wanda on investment properties.

Observers said this could benefit both companies. Credit Suisse said in a research note that Vanke would benefit from Wanda’s good connections and popularity with local government, which mean it is able to get land from local governments at cheaper prices than other developers – something Wang Jianlin himself has spoken of – while Vanke’s brand reputation would help to sell real estate in smaller cities.

Wanda has previously said it wants take an “asset-light” approach to China’s real estate market in future, and the company has been busy diversifying into other fields, investing in British yacht makers, U.S. movie theater chain AMC, and Swiss sports marketing company Infront Sports and Media, and taking a stake in Spanish football club Atletico Madrid in recent years. Shares in the two firms rose on the Hong Kong stock market after the partnership was announced.

Over the past year, the Chinese authorities have gradually begun to relax controls on the housing market, including access to housing loans and purchase of second homes, to avert a major slump in the market – and there have been some hints of a recovery, with housing sales up more than 10 percent in April, after falling in the first quarter. 

With some developers having struggled to repay loans in recent months, many observers had previously predicted consolidation in the market -- yet while China has previously seen deals between smaller real estate developers, it has never seen anything on this scale. Observers will be watching closely to see whether the new Wanda-Vanke partnership helps to give the market's fledlging revival a fresh boost.