Dry Land

One after another, major Chinese cities are reporting sluggish sales in their real estate markets, due primarily to the central bank's continual interest rate hikes and the following credit crunch.

For Zhang Qiang, a sales executive of Beijing Haolong Real Estate Company, the early weeks of 2008 have been especially cold - not because of the snow storm that hit the southern provinces, but the company's worrisome sales records.

It is the worst time in two years. "Before the spring festival, we barely managed to sell five apartments for one-time payments, at a pretty nice price for buyers," he says, "With that payment, we just got enough, 3 million yuan, to pay the salaries to our staff before the holiday season."

The company's project is about a half-hour walk from the Beijing International Trade Center, or Guomao. The average property price of the area is above 20,000 yuan per sq m.

"With such a favorable location, the houses sold quite well in the first nine months of 2007. However, sales dropped sharply in the fourth quarter, with more and more people taking a wait-and-see attitude," Zhang says.

Because of the government's policies to cool down the sizzling property market, especially increasing the down payment to 40 percent for a second apartment, many potential buyers have postponed their home purchase plan. Since the last quarter of 2007, major Chinese cities have actually seen sales and prices plummet in the property market.

Shenzhen was the first to feel the pinch. Sales of pre-owned houses in the southern city fell 36.8 percent in September, with prices dropping as much as 47.1 percent compared with August. New houses went for an average 14,797 yuan per sq m in the city in October, a 10 percent drop from September.

Shanghai's property market, too, has cooled down since mid-November, dropping 50 percent from the first half of last year to below 600 apartments in November, according to the China Real Estate Index System.

Beijing municipal construction committee statistics show the average price of 45 new residential buildings dropped 358 yuan to 14,966 yuan per sq m in November, the first time the capital's property market fell in six months. More and more property projects are offering discounts or other sales promotions.

Shrinking sales and the government's tightening of property finances have substantially squeezed their cash flow. "We are still struggling to pull through, hoping the market will warm up in the second quarter of this year," says Zhang. "However, if this 'winter' is too long, we may have to sell the project to bigger developers."

M&As galore

"The year 2008 will be a difficult time for medium and small property developers, and there will be more mergers and acquisitions in the industry," says Quan Zhong, chairman of CHANGE, a Shanghai-based real estate services provider. Statistics show there are around 30,000 real estate enterprises in the country, leaving much room for a reordering of the sector, Quan adds.

In December, Shanghai Forte Land Co Ltd said in a statement to the Hong Kong stock exchange that the company had spent 970 million yuan in taking a 40 percent stake of Wonderful World Town, a 1.1 million sq m project in Shanghai's Pudong area, making it the largest acquisition by Forte ever. The remaining 60 percent went to Vanke, the country's largest property developer.

Sino-Ocean Land, a Beijing-headquartered property company, is also reported to be considering acquiring Shenzhen City Construction Investment Development Co Ltd. Li Ming, chairman of Sino-Ocean Land, tells China Business Weekly that around 40 percent of the company's land bank was achieved through merger and acquisition. "And we are going to increase our land bank from 8.6 million sq m to 18.6 million sq m within a year, still largely relying on M&As."

Both capital and land are the driving forces for growing M&As in the real estate sector. As land supply shrinks, the bids in public auctions are rising. Acquiring developers and project equity have thus become a more economical mode of gaining land. On the other hand, enterprises that have land but lack the capital to develop it are also seeking buyers as the government has the right to reclaim land that hasn't been developed within two years.

Meanwhile, M&As between foreign players and local developers are also speeding up.

"Because of the government's more restrictive policy on foreign investors' entry into the property market, many of them, especially the newcomers, would like to join forces with local players," says Eric Chan, deputy managing director of Savills (Beijing branch), a UK real estate service provider.

Acquiring local developers is a shortcut for foreign companies to expand into China, especially since the government has raised the threshold for foreign investors wishing to establish real estate companies on the mainland. Now only those who have land-use rights and own property can start real estate firms.

"We are going to take over another eight to 10 projects within a year," says William Zen, chairman of Hong Kong-listed Road King Infrastructure. The company completed its acquisition of a 94.74 percent stake of Beijing-based Sunco Property in August, boosting Road King's land bank on the mainland from 2.9 million sq m to 7.5 million sq m.

Bumpier road

Since getting money from banks and foreign investors is becoming increasingly difficult, it is natural for Chinese real estate firms to turn to the capital market. According to Bloomberg statistics, 13 mainland real estate firms floated shares at Hong Kong and overseas capital markets last year, with 70 percent of them raising 60 billion yuan in Hong Kong.

And, the list for 2008 may be even longer. According to international accounting firm PricewaterhouseCoopers, around 90 Chinese enterprises are expected to float shares in Hong Kong this year, with real estate enterprises and energy companies being the majority.

"There may be more property firms seeking listings in other overseas stock exchanges, but most will still choose Hong Kong, the most convenient capital market," says Chris Brooke, president & CEO of CB Richard Ellis.

Guangzhou-based Evergrande Real Estate Group, Star River, Excellence Group, Beijing-based Sunshine 100 Real Estate, Chongqing-based Lonhu Property and Henan-based Central China Real Estate Group are all reported to be preparing for listings in Hong Kong.

"Without strong capital backup, you can hardly keep pace in the fierce land bidding," says Yi Xiaodi, president of Sunshine 100 Real Estate Group. "But the tougher monetary policy makes it more difficult for enterprises to get bank loans. So developers have to raise money from the capital market."

However, recent stock market reverses and serial measures to squeeze the property sector may mean real estate firms will find the ride to capital markets far bumpier this year.

Changsheng China Property Co Ltd, a mainland commercial developer, said last month that it had decided not to proceed with an initial public offering in Hong Kong because of the current turmoil in the international capital markets and adverse market conditions. The company had planned to raise HK$830 million to HK$1.28 billion by issuing 250 million shares, according to its prospectus.

Evergrande Real Estate Group, a Guangzhou-based residential property developer, also did the same. After receiving a nod from the Hong Kong exchange authorities in January, the company chose to opt out of an IPO roadshow. It still hasn't worked out a listing timetable.

According to Huang Lichong, managing director of Synergy Capital, around half of mainland real estate firms may fail to float shares in Hong Kong as they had planned.

Besides direct IPOs, a number of real estate firms are also striving to enter the capital market by acquiring listed shell companies. "Since the regulator has very strict requirements for direct IPOs, raising money through shell companies has become another handy option," says Li Wenjie, general manager of Centaline China (North China region).

Dalian Jinniu Co Ltd, a Shenzhen-listed steelmaker, last month said in a statement that its 40.67 percent of stakes had been transferred to Zhongnan Group, which will inject the assets of its property arm Zhongnan Real Estate into Dalian Jinniu. If the deal goes through, Dalian Jinniu will turn itself into a real estate company.

(China Daily 02/25/2008 page1)