Tight credit puts Chinese property companies at risk of takeovers
HONG KONG: Squeezed by a clampdown on bank lending, several big Chinese property companies could fall prey to takeovers by rivals or funds if they fail to push through IPOs this year, according to one of Citigroups top bankers in Asia.
As many as 40 unlisted Chinese developers have taken on structured investments, including convertible bonds, with investors counting on initial public offerings in Hong Kong for their exit strategies.
But if the companies fail to list soon, they will have to refinance at a time when convertible bond investors are expecting 15 percent to 20 percent internal rates of return to compensate for higher risk, compared with 12 percent to 15 percent a year ago.
Edmund Ho, Citigroups head of Asia property investment banking, said some companies may need to sell themselves to better-capitalized listed developers or to private equity funds, starting in the second half of this year.
“Those companies are under pressure because the cost of capital is high,” Ho said. “The take-out has always been an IPO, so they have to refinance if an IPO doesnt happen.”
Volatile stock markets have derailed several IPOs globally in the past couple of months, including in Hong Kong.
Developer Changsheng China has postponed a $145 million listing and bankers say rival Hengda Real Estate is still waiting for the right moment to introduce an IPO worth as much as $2 billion after receiving approval in January.
Other planned deals include a $1 billion IPO by Longhu Real Estate, arranged by Citigroup and Morgan Stanley, and a listing of similar size by Star River Group.
Ho said that he expected the total value of Chinese property IPOs in Hong Kong to exceed the approximately $8 billion listed last year.
“Im expecting more,” Ho said. “At least 20 to 30 were lining up listings this year and they will be bigger ones, of $1 billion and more, but the recent correction may reduce the number.”
Beijings efforts to cool the housing market have clouded IPO prospects by contributing to a slide in Chinese property stocks listed in Hong Kong, by as much as 50 percent in three months from late October.
The austerity measures encouraged the rush to raise capital in the first place, but Chinese regulators have been loath to approve property company listings in Shanghai for fear of further stoking property prices.
With average home prices doubling since 2002, Beijing has told banks to curb loans to developers, raised interest rates, imposed taxes on capital gains and land appreciation and employed a “use it or lose it” policy to deter land speculation.
The measures hit housing market transactions at the end of last year in some cities, including Guangzhou, Shanghai and Shenzhen. With many developers struggling to recycle money from apartment sales to finance new projects, analysts believe thousands could go bust.
Among the predators could be a handful of land-hungry listed developers with strong balance sheets, including Agile Property and Yanlord Land Group, analysts say.
Kitty Cheung, an analyst at BOC International, said many developers were vulnerable, because they owed money for land purchases.
“If the IPOs go on delaying for one or two quarters, it will be quite dangerous for some developers,” she said. “Some have huge land banks and many are waiting to pay land premiums.”
Cheung said even some listed developers were heavily indebted, short of capital for big projects, and needed to enter joint ventures with big Hong Kong developers like Sun Hung Kai Properties and Cheung Kong.
“People are focusing a lot on quality and brand name, not land bank,” Ho said. “Therell be more selection in the market for investors, in terms of geography, land bank, brand name and market segment,” he added, referring to upcoming IPOs.
