Liu: Launching Shanghai Bay at the right time and at the right price

2010 has been a difficult year for China’s property developers. The government’s tightening measures in April have cooled China’s overheated property market and curbed speculative demands. High-end property developer Glorious Property, founded in 1996 by controlling shareholder Zhang Zhirong, has been hit hard by the measures as it had to defer the major launch of its flagship project Shanghai Bay. However, contracted sales have started to pick up in September and October, with the launches of Block 10 in Shanghai Bay and Phase I of Nantong Villa Glorious and Phase II of Royal Lakefront, a residential project located in the suburbs of Shanghai.

 

The three projects contributed 1.3 billion renminbi (US$242 million) to a total of 1.606 billion renminbi in contracted sales for September 2010, an increase of 138% on the August figure of 674 million renminbi. The contracted sales area in September more than doubled to 134,733 square metres compared to the previous month. In the first nine months of 2010, contracted sales rose 71% year-on-year to 5.819 billion renminbi and the contracted sales area sold increased 57% to 567,636 square metres. During the first 10 days of October, a traditional hot season within the National Day Golden Week for property sales in China, the company achieved contracted sales of 670 million renminbi.

 

 

Despite the solid figures, contracted sales are still far behind the management’s target of 15 billion renminbi. The company’s shares have been under pressure since the interim results were worse than expected as a consequence of the delay in the sale of Shanghai Bay. The next two months will be a critical time for the company, as well as some other mainland China property developers trying to ramp up most of their sales in the last few months of the year.

 

Liu Ning, chief operating officer of Glorious Property, remains defiant. “We are confident that we can meet our sales target by the end of this year.” He points out that the company’s total saleable gross floor area (GFA) in the second half of 2010 reached 2.1 million square metres, of which 1.4 million square metres represented residential projects. Shanghai Bay’s saleable GFA only accounted for about 100,000 square metres of GFA, with the rest coming from a number of projects located in Beijing, Tianjin, Harbin and Nantong.

 

“While we had to delay the sale of Shanghai Bay in the first half, most other projects are being launched in accordance with our schedule, since our middle-end property projects are less affected by the tightening measures,” says Liu. “For Shanghai Bay, we are looking to launch it at the right time and at the right price.” Even without taking Shanghai Bay into account, Liu feels that the company will be able to achieve its target. “For example, if we sell the remaining 1.3 million square metres of GFA at about 10,000 renminbi per square metre, we will manage to achieve 13 billion renminbi of contracted sales in the second half of the year.”

 

China’s property market has experienced a sharp correction in both transaction volume and property prices, following the introduction of the government’s tightening measures in April aimed at curbing speculative demand for real estate and at ensuring supply of affordable housing for the masses. The measures included raising the down-payments and mortgage rates for the purchase of a second and third home and restricting pre-sales by developers.

 

Shanghai Bay’s new launch was originally scheduled as the backdrop of the Shanghai World Expo in May but the company decided to delay the sale in view of the poor market sentiment and falling property prices, due to the announcement of the new round of austerity measures by the PRC central government. Prior to that, only a few units in Block 2 had been sold in a previous launch.

 

As the property market has been recovering in August and September, the government has launched a new round of measures in late September. (See China Update.) Glorious Property managed to sell more units of Shanghai Bay, selling over 7,000 square metres of area in September, compared to the 100,000 square metres planned for the sale in the second half. Yet, the actual pace at which it can sell the project will much depend on the market situation, the company admits.

 

 

Shanghai Bay, a luxurious property project situated in Shanghai’s Xuhui district along the west side of the Huangpu River, enjoys the view of Shanghai World Expo. The company acquired the piece of land at a relatively low cost a year ago, and turned it into its flagship project in Shanghai. The integrated project with extensive residential areas, retail space and hotels occupies an aggregate site area of about 178,734 square metres and has a total of 892,907 square metres of GFA.

 

While the management goes out of its way to emphasize that the saleable area of its flagship project only represents a small proportion of the company’s total GFA this year, the amount of revenue generated is still significant in light of the project’s average selling price of 50,000 to 60,000 renminbi per square metre. Considering Phase II’s better views and proximity to the river, Liu believes that the company should be able to set the average selling price of Phase II higher than Phase I.

 

At present, Glorious Property has 29 projects in 11 cities including Shanghai, Beijing, Tianjin, Harbin, Wuxi, Suzhou, Hefei, Shenyang, Nanjing, Nantong and Changchun. Stressing that the company has enough projects to sell other than Shanghai Bay, Liu says the company will remain focussed on prime locations of key economic cities in the Yangzi River Delta, in Northeast China and the Pan Bohai Rim (which includes high-growth cities such as Beijing, Tianjin, Dalian, Shenyang and Qingdao).

 

As of June 30 2010, the company has a total land bank of 17.68 million square metres, sufficient to meet the company’s development needs in the coming five to seven years. Evenly distributed over first-tier and second-tier cities, Liu says the land banks are at excellent locations and were acquired at low costs averaging about 1,200 renminbi per square metre. “The average selling prices in all our projects reflect the fact that we are good at discovering land in locations that have strong potential. For example, the average selling price of a square metre area in our Hefei project has increased from 5,000 renminbi to 7,000 renminbi, while our Harbin project rose from 4,000 renminbi to 8,000 renminbi per square metre,” says Liu.

 

The company is trying to replicate the model of Shanghai Bay for luxurious property projects in other cities such as Nanjing and Tianjin, while seeking to diversify its projects into commercial properties. “Our Shanghai Bay project in Shanghai has helped us build a brand that can be repeated in other cities.”

 

 

“As we develop more integrated projects combining retail space, hotels and residential such as that in Shanghai Bay, our revenue from commercial properties will gradually increase,” says Liu, noting that there will be about 12% to 15% of retail facilities in some residential projects. “This will provide us with a stable and profitable return, while the prices will continue to go up.”

 

In June, Glorious Property held a groundbreaking ceremony for its Bashangjie Project in Hefei, Anhui. The project, with a total GFA of about 1.13 million square metres, will be developed into a large mixed-use complex consisting of hotel, offices and retail area. Meanwhile, it is planning to develop the two other plots of land in Xujiahui district of Shanghai into first-class commercial projects. Liu says the management will continue to identify and acquire land banks in cities with a strong potential and in districts that enjoy strong government support for development. “Some cities are attracting greater inflows of people while some are facing outflows. It is difficult to see a sharp correction in property prices in first-tier cities like Shanghai as the number of people continues to grow.”

 

The company is relatively prudent in terms of acquisitions. It expects to achieve an investment rate of return above 15% for every plot of land acquired. As of June 30 2010, the company had a total cash balance of 4,998 million renminbi and a gearing ratio of 50%, with up to 14 billion renminbi of unutilized bank credit. The company is relatively cash rich after the completion of an initial public offering in October 2009.

 

“We have looked at cities such as Nanjing, but we only started a project recently after we had the opportunity to cooperate with the local government,” Liu says. “Project acquisition and cooperation with a local partner will remain opportunistic but local governments tend to like partnering with experienced developers like ourselves who can introduce to their cities significant improvements in urban planning designs and project value appreciation potential.”

 

Glorious Property’s revenue in the first half of 2010 jumped 69.7% to 2.5 billion renminbi with an average selling price of 16,082 per square metre. While the gross profit margin increased from 49.2% to 53.7%, its net profit dropped 57% to 366.1 million renminbi as this year’s result reflected a one-time loss on redemption of promissory notes and did not include the valuation gains of investment properties posted in the previous year.

 

During the wave of debt offering by mainland Chinese property developers, the company tried to launch the sale of a high-yield bond in April 2010. Yet, it opted not to pursue the deal as the funding window closed quickly, the cost become unreasonable and the government’s tightening policies were beginning to bite. For its future funding, it will consider factors such as funding cost, impact on overall liability structure and debt profile.

 

While Shanghai Bay will be a core focus of the company in the coming months, other projects will continue to contribute to its total of contracted sales and contracted sales area. Liu says the sales of Shanghai Bay in the second half will be one of the important factors affecting the company’s plan for the next year, which will be announced later.