CITIC Group, one of China’s largest state-owned investment conglomerates has effectively sold off its mainland residential development business to China Overseas Land & Investment Ltd in a transaction valued at RMB 31 billion ($4.8 billion).
Under the terms of an agreement signed on Sunday, China Overseas Land is swapping HK$29.72 billion ($3.83 billion) worth of its shares (equal to an 11 percent stake in the developer), plus RMB 6.15 billion ($947 million) worth of its commercial real estate assets, for CITIC residential projects spanning 25 mainland cities.
The transaction, which includes nearly all of CITIC’s residential sites in China, represents what may be the biggest consolidation to date in a mainland real estate market where the number of developers is rapidly dwindling in the face of higher land prices and more uncertain sales.
State-Owned Giants Trade Assets and Shares
Under the terms of an agreement signed between the two parties on Sunday, China Overseas is acquiring 24 million square metres of land from CITIC Real Estate and CITIC Pacific, both subsidiaries of the Hong Kong-listed conglomerate.
The properties include sites in the first tier cities of Beijing, Shenzhen and Shanghai, as well as projects in some overbuilt second and third-tier hubs such as Chengdu, Dalian, and Chongqing. Already a top ten-ranked developer, the deal will expand China Overseas’ land bank by 50 percent, according to a statement by the developer to the Hong Kong stock exchange today.
China Overseas is financing the transaction by issuing 1.1 billion new shares, to be sold to CITIC at HK$27.13 each, a 5.36 percent premium to the stock’s closing price on Friday. The new block of shares is equal to 11.1 percent of China Overseas existing share capital, according to an account in the Financial Times.
In its own statement to the Hong Kong exchange, CITIC pointed out that following the transaction it would be able to focus its business on commercial real estate, but would “retain its exposure to China’s residential market through its approximately 10% stake in China Overseas.”
CITIC also pointed out gains that could accrue to the company from China Overseas taking over responsibility for loans owed by the project companies to the conglomerate’s other subsidiaries. CITIC is active in a broad array of financial businesses in China, including retail and investment banking.
China’s Real Estate Industry Continues to Consolidate
The deal between CITIC and China Overseas Land is one of the largest examples to date of the consolidation occurring as China’s real estate industry moves away from the easy profits achieved during the sector’s 15 year boom.
In the past six months major foreign developers have been selling off projects to local competitors, and many smaller developers have been shut out of the market by a combination of skyrocketing land prices in major cities and an oversupply of unsold homes in the hinterland.
Late last month Guangzhou-based Country Garden Holdings indicated that it was buying the Foshan Lingnan Tiandi project in the southern Chinese city of Foshan from Shui On Land, and in December top-five mainland developer Evergrande bought $3.2 billion in projects from Hong Kong’s New World Group.
While home prices rose more than 50 percent last year in Shenzhen, and have been climbing rapidly in Shanghai, the scarcity of land in these golden cities, and the corresponding high land prices, means that many smaller developers are shut out of these profitable markets.
The result has been that some of the largest developers, particularly state-run giants which have superior access to financing, have been able to buy up projects from smaller competitors. A survey by Mingtiandi of financial results for more than 60 mainland property firms in the first half of 2015 showed that, while more than half failed to achieve profit margins of 10 percent or more, several of the top ten developers achieved profit levels of 30 percent or greater.
The Chinese government has been encouraging consolidation in the real estate market to reduce what it sees as “disorderly” situation and make home prices easier to regulate.
In 2014, Yu Liang, the CEO of leading developer China Vanke, famously predicted that the majority of Chinese real estate firms would cease to exist within the next 15 years, and this latest deal between CITIC and China Overseas Land appears to be a major step in this transition.