Sour market looks sweet to China's
developers By Olivia Chung
HONG KONG – Mainland Chinese property
developers, looking to emulate competitors that
raised almost US$7 billion in the Hong Kong stock
market in 2007, are lining up to raise cash in a
market environment that has turned sour since the
stunning initial public offering of developer
Country Garden Holdings last April.
The
HK$12.9 billion (US$1.65 billion) IPO by Foshan,
Guangdong-based Country Garden made the company’s
25-year-old owner Yang Huiyan the mainland's
richest woman, as retail investors applied to buy
255 times more shares than were available while
the
institutional portion of the sale was more than 50
times oversubscribed.
Since that sale, the
government has lifted interest rates and taken
other steps to curb rising property prices and
dampen speculation in the housing market, with
further measures expected this year. The share
prices of mainland developers have also plummeted
since last summer along with the global stock
market declines.
Undaunted by the market
downturn, Changsheng China Property kicked off a
marketing roadshow for its IPO on January 14.
Other developers planning Hong Kong listings as
rising land prices encourage them to seek outside
funding for expansion include Fineland Real
Estate, Hong Yu Group and Evergrande Real Estate
from Guangzhou, Shenzhen-based Excellent Group and
Chongqing-based Longhu Real Estate.
"As
the real estate industry is capital intensive,
share and bond sales will continue to be good ways
for mainland developers to buy land and finance
their projects," says Sherman Lai, director and
general manager for Centaline (China) Property
Consultants.
Changsheng, a residential
property developer that also has rental income
from commercial properties, is selling HK$1.13
billion worth of new shares at HK$3.32 to HK$4.51
each.
Changsheng is trumpeting the quality
of its developments as an incentive to potential
investors. Its high-class Seasons Park project was
ranked second in Beijing in 2006 in terms of
rental returns, according to FinanceAsia.com,
which cited a syndicate research report as saying
the company's rental revenue would almost double
to 141 million yuan (US$18 million) in 2009 from
76 million yuan in 2006.
The company has
land reserve of about 1.2 million square meters,
spreads from the Guangdong province capital of
Guangzhou, to Beijing and to Taiyuan, capital of
northern Shanxi province. The public offering will
close on January 23, with trading expected on
January 31.
Changsheng managing director
Tong Yuan said that given the company's "unique
approach'' to tap the high-end market, it should
be valued differently from national
mass-residential developers. The locations of the
company's land and those of other developers, "are
like abalone and shark fin. The value of the land
is higher than that of many property developers,''
Tong said, according to a Hong Kong Economic Times
report.
Even so, Changsheng is selling its
shares at a discount of up to 50% to its forecast
net asset value (NAV) for 2008, Bloomberg
reported, citing unnamed sources.
That
compares with Country Garden, which currently
trades at a premium of 81.4% to its NAV. Soho
China, which also listed in Hong Kong last year
and focuses on high-end residential developments
and commercial projects, at present trades at a
26% premium to its NAV, according to FinanceAsia.
com. Guangzhou R&F, the biggest developer in
the city, trades at a premium of 26.1% to its NAV.
Changsheng, Fineland and other developers
are looking to raise cash as land prices in China
are rising at an increasing rate. Average land
prices rose 15% in the third quarter, up from
13.5% three months earlier and 9.8% in the January
to March period, according to China Real Estate
Chamber of Commerce data. They are also looking to
build cash reserves as government efforts to rein
in the economy start to bite, said Jason Yang, a
senior manager at the professional services
department of property agency Colliers
International in Beijing.
"They are now
either launching public share sales or bond sales
to cope with the possible cash flow problem
brought by the tightening measures," Yang said.
The People’s Bank of China, or the central
bank, raised interest rates six times last year to
cool inflation, increasing borrowing costs for
real estate companies. Developers are also to be
charged a fee of 20% of a land transaction price
if they hoard land plots and leave them idle for
more than one year after acquiring them, the State
Council, or cabinet, said in a notice on its
website on January 7.
Changsheng's Tong
said excessive land reserve could become a problem
for some property developers. "We are developers,
developing the land once we have it, which is
different from other real estate merchants, who
purely hoard land plots and leave them idle and
will always be the target of China's tightening
policies."
Developers hoarding land are
looking to profit from continued gains in property
prices as appreciation of the Chinese currency,
decade-high inflation and negative real deposit
rates encouraged speculation in the property
market.
"Even if the government enhances
its tightening measures once and again, these
companies are able to develop the land they have
bought and sell the projects at a higher price to
capture the booming property market," Alvin Wong,
a property analyst at Kim Eng Securities in Hong
Kong, said.
Home prices in China’s 70
large and medium-sized cities jumped 10.5%
year-on-year in November, with the growth rate 1
percentage point higher than the previous month,
according to the latest figures provided by the
National Development and Reform Commission. The 7%
full-year gain was up from 5.5% in 2006, with some
big cities such as Beijing and Shenzhen seeing
increases of more than 10%, according to the
Chinese Academy of Social Sciences.
With
economic growth expected to continue at a
breakneck pace after probably exceeding 11% last
year, compared with an estimated 3.3% in the
United States, and the country's strong economic
fundamentals, the Chinese property sector will
continue to be attractive to investors, analysts
said.
"Many investors are willing to take
the risks brought by the negative pressure from
the Chinese government’s monetary tightening
measures," Centaline's Sherman Lai said.
Rising personal incomes play a large part
in that gamble. In the first nine months of this
year, city dwellers' disposable incomes surged
13.2% and earnings for rural households jumped
14.8%, after being adjusted for rises in the
consumer price index, the National Bureau of
Statistics said in November.
The first
public land sale in Guangzhou this year suggests
demand is unabated. Evergrande Real Estate, which
is planning to list in Hong Kong this year, on
January 8 outbid more established developers to
pay 4.1 billion yuan for a site in a
residential-cum-retail hub in the city’s Tianhe
district. Its bid saw off seven other developers,
including market leader Guangzhou R&F and
China Aoyuan Property Group, which raised HK$3.64
billion in a Hong Kong IPO last October.
"The land sale result indicates mainland
developers’ emphasis on land reserve and they are
very confident about the mainland’s property
sector, especially the prime sites of the big
cities," Yang of Colliers said.
Whether
that confidence transmits to strong share sales
remains to be seen.
While Country Garden’s
IPO was a huge success, with retail demand for the
HK$5.38 shares encouraged amid support from Hong
Kong tycoons such as Henderson Land chairman Lee
Shau-kee, its shares crashed from a peak of
HK$14.18 in September to HK$8.04 on January 14 and
HK$7.05 on Wednesday as global markets reacted to
bank earning results in the US. (Shares of
Henderson Land, a leading Hong Kong developer that
also has mainland projects, were trading at around
HK$74 at the start of this week, close to their
52-week high of HK$79.80 on January 8.)
Sino-Ocean Land Holdings is doing little
better than Country Garden. A Beijing-based
developer of medium and high-end projects, it
raised HK$11.9 billion in Hong Kong in September
with an IPO price of HK$7.70 a share. The stock
was trading at HK$7.20 on Wednesday, down from a
HK$15.60 high on November 7.
China Aoyuan,
which touted its 4.19 million square meter land
bank when it priced its shares at HK$5.20 each in
early October is now trading at below its IPO
price, with the shares down from a high that month
of HK$7.50 to HK$3.36 on Wednesday. The IPO price
represented a 10% discount to the company's net
asset value against Changsheng's reported 50%
discount.
Investors are also walking away
from the largest developer in central Beijing,
Soho China. The stock gained as much as 23% on the
first day of trading after the company raised
HK$12.9 billion with an IPO price of HK$8.30. From
a high of HK$11.98 in early November the stock
tumbled to HK$6.44 this week.
Guangzhou
R&F Properties meanwhile is trading at around
HK$22.15 after trading at HK$45.60 in early
November.
Castor Pang, a strategist of Sun
Hung Kai Financial Group, remains optimistic,
though conceding that last year's government
measures and continuing concerns over spillover
effects of the US subprime mortgage crisis might
limit pricing ambitions in the first half.
''Once the tightening measures take effect
in the first half of the year, the government will
alleviate its efforts to cool the property market
in the second half, which would offer good
opportunities for the developers to be more
aggressive in their IPO plans," he said.
Hoping that he is right, Fineland, a
developer of mid-range to high-end homes in the
Pearl River Delta region and with a six million
square-meter land bank, plans to raise US$300
million from a Hong Kong IPO early this year. It
has hired JP Morgan to arrange the deal.
Guangzhou-based luxury residential
developer Hong Yu Group may raise at least US$1
billion in this half, Bloomberg quoted sources as
saying. The firm has hired Morgan Stanley and UBS
AG to arrange the sale of its real estate
business, said the sources.
Longhu Real
Estate, luxury property developer based in
Chongqing, plans an IPO of up to US$1 billion in
Hong Kong this year.
Olivia
Chung is a senior Asia Times Online
reporter.
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