 | |
| Xiao: China property market has to go through consolidation | |
According to an April report by HSBC, 30 to 40 China property companies in the Hong Kong IPO pipeline are set to raise US$20 billion in the equity market. Large land banks used to trigger rounds of target price upgrades from equity analysts in 2007. However, with the tightening of monetary policy in China and the government’s policy stance of discouraging land hoarding, large land banks have become millstones round the necks of highly-levered developers, especially those planning an IPO.
The China Securities Regulatory Commission (CSRC) has made it known that it will still endorse the offering of new shares by quality developers, but will not permit share offers by those who plan to use the funds for land hoarding or for purchasing land for development. In other words, the A-share market is now no longer an option for developers anxious to raise capital.
Consider the case of Evergrande Real Estate. Its dream of raising capital through share offerings was shattered in mid-March when it had to scrap a US$2 billion initial public offering (IPO) plan due to insufficient orders for its institutional and retail tranches. Having failed to raise funds by way of an IPO, the country’s second largest developer in land bank terms resorted to a private share placement and price cuts in an effort to repay its borrowings amounting to 14.1 billion renminbi. (See related story on page 36)
Evergrande built up most of its empire during the past year. The Guangzhou developer had only a six million square metre land bank in 2006, but its land bank jumped almost eight fold to 45 million square metres across 20 cities, courtesy of the pre-IPO funding it received in 2006 and 2007 through US$400 million convertible bonds issued to Merrill Lynch, Deutsche Bank and Temasek as well as US$500 million structured loan from Credit Suisse. According to its prospectus, Evergrande is geared with 13.3 billion renminbi of bank and other borrowings outstanding as of January 2008 versus a cash balance of 1.2 billion renminbi as of September 2007.
After the abandoning of its IPO, Evergrande received US$400 million -US$500 million from private equity firms and hedge funds through a private share placement. The developer also tried to raise cash by engaging in cut-throat competition to stimulate sales of four of its projects in Guangzhou, with prices cut by as much as 40%.
And Evergrande is just the tip of an iceberg. China’s residential property market is highly fragmented, with more than 50,000 developers, of which the largest, China Vanke, has only acquired a 2.1% market share. As the market consolidates further this year, market observers expect large developers to be the beneficiaries.
More opportunity than risk
State-owned China Vanke, the country’s largest property developer by market value, believes in co-operation through specialization, in binding the advantage of individual developers through a platform of strategic co-operation. China Vanke has been consolidating resources in the industry since 2004, and through cooperation the company acquired more than 60% and 40% of project resources in 2006 and 2007 respectively. China Vanke’s executive vice-president Shirley Xiao says this will remain the core strategy of the company going forward.
Xiao says that for most larger listed property companies the prevailing credit tightening creates more opportunities than risks. She agrees that some developers who bought a lot of land last year will have greater pressure on their capital this year, although in general their capital adequacy is not affected. These developers may feel the impact on their purchasing power and their ability to start new projects in the coming two years, and that in turn may – to a certain extent – suppress the housing supply in the future.
The Shenzhen-based company holds 17.05 billion renminbi cash reserve as of the end of 2007. Three months later, by the first quarter of 2008, the reserve slightly dropped to 15.63 billion renminbi. During the first two months of 2008, China Vanke, which once aimed at a market share of 5%, enlarged its projects under development by 1.01 million square metres, of which the company was entitled to an interest of 520,000 square metres. The new gross floor area (GFA) to be developed for 2008 is 8.48 million square metres, while GFA completion is to be 6.89 million square metres.
“For an industry that is not yet mature, we think that with or without monetary policies, consolidation is set to take place, just that in the case today the monetary policies have speeded up the process. In the long run, we think that consolidation is a path the China property market has to go through to become more mature,” Xiao told The Asset.
Shimao Property, a Shanghai-based developer listed in Hong Kong in 2006, also makes use of the current consolidation in the market and has actively purchased land sites totalling planned gross floor area of 10.7 million square metres since the beginning of 2007. In the first quarter of 2008 alone, the group spent 7.6 billion renminbi on land acquisition, almost the same amount for the whole year of 2006.
Jason Hui, executive vice-president and executive director of Shimao, says that just as last year, the group plans to add another seven million square metres into its land bank this year. This means Shimao still needs to add four million square metres in the remainder of 2008 in order to reach its target. With a gearing ratio currently at 35% and a target to raise this to 40% to 50%, Hui says the company still has much room to acquire land.
Hui expects most of the purchase will come in during the third and fourth quarter because “more smaller developers will get into bigger trouble in the second half of the year”. Shimao has been negotiating with some smaller developers for a long time. “For some of the sites they bought four to five years ago at 1000 renminbi per square metre, they are still asking for 2000 renminbi now, while they may have asked for 4000 renminbi last year. So we will wait for opportunities to buy cheap land. We are not in a hurry.”
Foreign developers pour in
In the light of foreign property investors rushing into the market, Beijing has also tried to tame property prices and cool the economy by regulating the entry of offshore money. However, the vast opportunities created by China’s high GDP growth and urbanization have resulted in foreign developers pouring more money than ever into China to tap into a middle class hunger for new homes and rising capital values.
Sun Hung Kai Real Estate, one of the top developers in Hong Kong, hopes that its assets from China can contribute 30% of the group’s total assets of US$77 billion by 2010. The company now has a total commitment of 52 billion renminbi, and plans to commit 25 billion renminbi more in the next three years.
Despite Chinese regulators’ efforts to control high-end residential prices in the big cities, Alfred So, executive-director of Sun Hung Kai, says the company’s target is to build more high-end projects in main cities such as Beijing, Shanghai, Guangzhou and Shenzhen, where the absolute return is much more attractive. Besides the main coastal cities, the company also looks at provincial capitals such as Chengdu and Hangzhou.
“The big cities are more sophisticated and better to complete good high-end projects. The unit rate in these cities is also higher. On average, property prices in mainland China are a tenth of that in Hong Kong, so even if their profit margins are the same, the absolute amount from mainland China is still smaller. That is why we choose cities with a higher living standard, where the profit in absolute terms is more significant,” So explains.
As a foreign developer, So says Sun Hung Kai undertakes investor education by building icon buildings in the main cities, most of which are integrated property projects, so that investors can see the quality, technology and business model adopted by the company. “In a less mature market, the brand name is very important because the investors are afraid of being cheated. Investors in the second-tier cities may not know the brand names from Hong Kong that well, so we have to do more education by marketing,” he says.
