Chinese developers flock to part ways with property management

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HONG KONG – China’s indebted property developers are rushing to list their property management services on the stock exchange, pushed by enthusiastic investors and Beijing’s new restrictions on unbridled borrowing.

The property management unit of Sunac China, the country’s fourth-largest developer, debuted in the Hong Kong market on Thursday. Sunac Services closed 21.9% higher from its issue price at HK $ 14.14.

Sunac Services joins 13 others in raising a total of $ 5 billion this year, according to Dealogic data, with units of Evergrande Group and China Resources Holdings expected to add $ 3 billion to that tally.

IPO activity this year compares to $ 1.6 billion raised last year by such companies and $ 1.4 billion in 2018. It gives investors access to companies to fast growing, small cap with stable fees and commissions, unlike the boom and bust cycle that real estate developers leverage.

Developers are also facing pressure from China to limit its annual debt growth to around 15%, based on a widely publicized but still unofficial “three red lines” leverage policy, as Beijing aims to stifle systemic risk. The industry expects the rules to take effect in early 2021.

“If the above-mentioned policies continue over the next few years, the growth of the sector could slow down,” said Esther Liu, credit analyst at S&P Global Ratings. “We could also see an acceleration in sales of projects or even company stakes if issuers encountered refinancing difficulties. To control debt growth, more companies could look to a capital increase.”

China’s real estate sector accounted for 28.7% of the $ 24.4 trillion in outstanding yuan loans issued by the country’s banks during the second quarter, and that figure does not include funding offered by the shadow banking sector much. most important of the country.

Debt levels are considered large enough to wreak havoc in China’s $ 50 trillion financial system. Concerns about a major developer default is raising concerns about potential cross defaults on bank and trust loans.

Regulators under the “three red lines” policy would follow three ratios – liabilities / assets, net debt / equity, and cash / short-term debt – before letting a developer borrow more. A developer could increase their debt by 5% per year for each redline threshold they hit, for a maximum debt expansion of 15%.

The debt-to-asset ratio cap will be set at 70% and the net debt-to-equity ratio will be capped at 100%, Chinese media say, while developers are also expected to have enough cash to meet their short-term debts. term.

S&P estimates that only 6.3% of rated developers would meet the thresholds in all three categories, meaning most are expected to achieve discounted sales, increase equity, or control land and construction spending.

Although the real estate sector has rebounded from the impact of the coronavirus pandemic, signs of slowing are appearing. Real estate sales by floor space increased 7.3% year-on-year in September, compared to robust growth of 13.7% the previous month. New construction starts measured by floor area fell 1.9% in September compared to an increase of 2.4% in August.

Analysts expect the crackdown by regulators to result in virtually zero sales growth for 2021, as well as a 5% drop in house prices.

This prospect prompts developers to consider raising equity. But selling stakes at the parent company level is seen as unrealistic given the low valuations: the largest companies are trading at four to twelve times expected 12-month earnings, Capital IQ estimates, compared to more than 20 times a few years higher. early.

In addition, investor appetite for stock offers from real estate developers has been lukewarm at best. China Evergrande Group, Asia’s largest private sector debtor, last month raised just $ 555 million at a 14.7% discount from a target of $ 1.09 billion.

As a result, developers resort to spinoffs.

Evergrande, which aims to halve its $ 125 billion debt by 2022, plans a secondary listing in Shanghai for its Hong Kong-traded electric vehicle unit. The group is also in preliminary talks with investors for a listing of its property management unit after receiving approval from the Hong Kong Stock Exchange, sources said.

Listing business units appears to be the most attractive option for developers, as these are pulling a median multiple of 20 times their estimated revenue in 2021. Although recent quotes have slipped below the bid price, investors continue to bid on stocks.

The GEM City complex in Sunac in Shanghai includes shops, offices and apartments. (Photo by CK Tan)

Sunac Services, which lured Chinese internet giant Tencent Holdings as a key IPO investor, said its retail offering was 10.4 times oversubscribed while the institutional part generated offers for 4.9 times the proposed actions.

This came as Jinke Smart Services, which was listed on Tuesday, fell 0.4% below the offer price. Shimao Services Holdings slipped 3.6% below its issue price and KWG Living fell 28%. These latter two companies made their trading debut on October 30.

“The pipeline of new IPOs from large-scale operators competing for liquidity has likely led to the recent downgrade of the sector, in our view with investors switching to the new names,” said Cheng Wee Tan, senior analyst based. in Singapore at Morningstar. “After the listing of the new IPOs, it’s now about the execution of the growth in gross floor area under management and the acquisition strategy. Positive earnings releases and the execution of mergers and acquisitions will be critical to a positive stock price appreciation for these companies.

IPOs pave the way for property management units to raise funds separately to make acquisitions that can increase their market share. The announcements also pave the way for investing in new properties not promoted by their parent, thus increasing the stock available to them.

China’s property management market comprises 25 billion square meters of gross floor area and is expected to reach 31 billion square meters by 2024, according to China Index Academy, the country’s largest independent real estate research firm. Analysts are predicting consolidation in the industry, which has 130,000 participants. These business units need to break free from the clutches of their indebted parents in order to develop.

Parent companies will continue to hold controlling stakes in property managers, allowing them to participate in growth, analysts said.

“The industry is still growing rapidly – considerably higher than real estate developers with high asset potential,” said David Blennerhassett, analyst at Quiddity Advisors who publishes on the SmartKarma platform. “Property management services are counter-cyclical in nature and operate on a thin asset model, tend to be more defensive and are less prone to political risk than for real estate developers.”


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