How Chinese real estate developers dodge market cooling measures
Large Chinese real estate developers looking to expand are taking the M&A route, circumventing the government’s lending curbs and auction restrictions aimed at cooling the housing market, demonstrated by a trend-defying uptick in real estate M&A.
Due to a limited supply of land coupled with large demand, the government has implemented new rules restricting land auctions. As the new rules make it more difficult to reserve land through auction, large corporates have started to increase land reserves through company acquisitions, notes a recent PwC report. The new auction process requires bidder evaluation rather than just bidding by price. The evaluation criteria include total assets, development floor area and corporate ranking. Under this system, most land is auctioned by central enterprises, state-owned enterprises and large private real estate groups.
The new restrictions have been met by a growth in domestic real estate M&A deal volume, which surged 78.5% year-on-year in the first half of 2017, while deal amount rose 24.7%, according to the PwC report.
The rise in real estate M&A volume bucks the overall decline in M&A activity in China. In the first half of 2017, M&A deal volume fell to US$283 billion from US$355 billion in the second half of 2016. Domestic strategic M&A fell by around 15%, while outbound M&A, under widely publicized curbs, fell 13% in value terms.
Further, in recent years large real estate transactions were mainly initiated by real estate companies, while non-real estate firms have been less active, being restricted by capital. The non-real estate companies involved in the market are mainly groups with abundant capital such as insurance companies and conglomerates. Many insurance companies invested in real estate companies largely due to their long-term and stable return.
Real estate M&A activities were underpinned by large deals. There were 82 deals with volume larger than US$100 million in the first half of 2017, which accounted for 39.6% of the total deal amount and 92% of the total deal volume.
In terms of outbound activity, real estate transactions in the first half of 2017 totalled 37, valued at US$37.6 billion and were mainly concentrated in logistics and land parcels due to restrictive government policies, says the PwC China study.
The rapid development of China’s e-commerce business and rising demand for global logistics warehousing resulted in several large outbound transactions during the first half of 2017. These include the HNA announcement in April to acquire all the shares of Singapore-listed logistics company CWT Limited for S$1.39 billion, and CIC’s US$13.3 billion acquisition of all the shares of Blackstone Group’s European logistics real estate company, Logicor.
Illustration by Sara Seneviratne.
12 Sep 2017