Bloomberg News

China’s Cash-Poor Developers Fuel Commercial Property Deals

May 01, 2012

This photo taken from the Jin Mao Tower in the financial district of Pudong shows a view of the Shanghai skyline along the Huangpu River. Photographer: Peter Parks/AFP/Getty Images

This photo taken from the Jin Mao Tower in the financial district of Pudong shows a view of the Shanghai skyline along the Huangpu River. Photographer: Peter Parks/AFP/Getty Images

Shanghai and Beijing, the two cities with Asia’s fastest-growing office rents, are set to lead a surge in commercial property transactions in China as more developers sell assets to raise cash for housing projects.

Sales of office and retail buildings in the two major Chinese cities will double this year to $10.4 billion, according to Cushman & Wakefield Inc., which doesn’t make nationwide projections. The number of deals being negotiated in Shanghai in the past six months rose 50 percent from a year earlier, Jones Lang LaSalle Inc. said.

Chinese real estate companies are selling commercial buildings for funds to complete apartment projects after the government’s two-year effort to curb home prices tightened credit. The cash ratio, a measure of liquidity for developers, fell to the lowest since 2008 as of December, according to data on 146 listed builders in China and Hong Kong compiled by Bloomberg.

“Many Chinese developers today are more willing to sell their office buildings or retail space because they need to access capital for their residential projects,” said Jack Ye, Shanghai-based national director of investment at Cushman, the world’s biggest closely held property service company.

Builders are opting to sell commercial developments because offering residential projects is difficult amid the curbs, Ye said. The government has imposed limits on how many apartments can be owned, as well as increased mortgage and down-payment requirements.

Falling Home Sales

China’s home sales fell 18 percent from January to March, the first quarterly drop since the government changed its methodology for property data in February 2011. Home prices in April fell 0.3 percent from March to a 14-month low, SouFun Holdings Ltd., the nation’s biggest real estate website owner, said today.

Greentown China Holdings Ltd. (3900) said on April 17 it will sell a Shanghai project including loans for 2.1 billion yuan ($333 million) to Soho China Ltd. (410) to improve its cash flow. CapitaMalls Asia Ltd., the retail property unit of Southeast Asia’s largest developer, bought a 39,500 square-meter (425,174 square-foot) commercial site in Beijing from a subsidiary of Poly Real Estate Group Co., the Guangzhou, southern China-based developer whose first-quarter net income fell 24 percent.

Profit margins and cash flow at smaller local and regional developers have been hurt by government efforts to cool down the housing market, Matt Jamieson, an analyst at Fitch Ratings Ltd., wrote in a note on April 17. The government restricted the number of homes each family is allowed to buy.

Soho’s Acquisitions

Soho, the biggest developer in Beijing’s central business district, plans 10 billion yuan of acquisitions this year, Chairman Pan Shiyi said in Hong Kong on March 14.

Developers are struggling to complete housing projects as prices extend declines. Home prices fell in a record 37 of 70 cities from a year ago tracked by the government in March as officials pledged to keep restrictions on property purchases that have sapped buyer demand.

Hangzhou Glory Real Estate Co., a developer based in Hangzhou in Zhejiang province, filed for bankruptcy on March 30, becoming the first developer to file for insolvency in the eastern Chinese province.

Beijing and Shanghai had the fastest office rental growth in 2011 in the Asia-Pacific region, according to New York-based Cushman. Beijing’s prime office rents climbed 75 percent to become Asia’s third-costliest office market after Hong Kong and Tokyo, while those in Shanghai jumped 24 percent.

‘Losing Future Income’

“Selling their profitable commercial properties is easier as it’s only a matter of losing future income if rents continue to rise,” Ye said.

Greentown, the biggest builder in Zhejiang province, has raised 3.73 billion yuan through five transactions since December, Chief Financial Officer Simon Fung said on Feb. 9.

The developer’s long-term credit rating was cut to CCC+ on April 26 by Standard & Poor’s, which cited “heightened risk for refinancing and debt repayments.” Greentown has the second- lowest Altman’s Z-score among 25 Chinese property firms listed in Hong Kong, a measure that tracks the probability of companies entering bankruptcy within the next two years, based on data compiled by Bloomberg.

Property companies listed in China and Hong Kong face worse cash shortages this year than in 2008, according to a survey of 131 companies by CEBM Group Ltd., a Shanghai-based investment advisory firm. In 2008, China’s home prices and sales fell for the first time since the government started encouraging private- home ownership in 1998, as credit froze in the wake of Lehman Brothers Holdings Inc.’s collapse.

Buying Low

Foreign funds and cash-rich Chinese developers are looking for opportunities to “buy low,” said Alan Li, Shanghai-based head of investment at Jones Lang, the world’s second-biggest publicly traded commercial-property broker. Some of the deals under negotiation may be closed in two months, he said.

Property prices, including residential and commercial, climbed 7.5 percent in 2010 as China encouraged a lending spree to cushion the economy with a record 9.6 trillion yuan of loans issued in 2009.

“It’s a delayed reaction to the financial crisis that started post-Lehman in 2008,” said Joel Rothstein, a Beijing- based real estate and structured finance partner at Paul Hastings LLP, a U.S. law firm.

Inquiries from prospective clients considering the purchase of properties have increased about 20 percent to 30 percent in the past three months from a year earlier, he estimated.

Percolating Actions

“There have definitely been actions percolating much more than for quite some time,” he said. “People have gotten far enough to the point that they are actually approaching law firms to conduct initial due diligence or advise on deal structuring or term sheets.”

Developers that plan to sell assets are reluctant to cut prices as they bet the government will ease curbs and commercial rents will rise, Cushman’s Ye said. Prices of commercial properties in Beijing and Shanghai have fallen about 2 percent to 5 percent this year, said Li at Jones Lang, based in Chicago.

“We expect to see some more of these transactions for smaller and liquidity-weaker players in the market,” said Vanessa Chan, an analyst at Fitch in Hong Kong, who expects the government to maintain its property policy this year. “Developers will keep their refinancing options open.”

Potential buyers say they don’t expect a fire sale even as developers rush to sell their commercial buildings.

“Certainly we are active in China now, but good assets will not be sold at distressed prices,” Ng Beng Tiong, chief executive officer of the private funds group at ARA Asset Management Ltd. (ARA), a fund management unit of Hong Kong billionaire Li Ka-Shing’s Cheung Kong (Holdings) Ltd., said in an interview in Beijing. “You might get something with a fair value at a slight discount in the current market.”

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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