Real Estate M&A Deals Up 326 Percent in 2014 as Market Churns

China’s housing sales fell 7.7 percent in the first quarter, the country’s property sector witnessed a record default last month, and some real estate investors couldn’t be happier.

While the nation’s property developers were busy cutting back on new construction by 25 percent during the first three months of this year, China’s deal artists were busy snapping up more than three times as many real estate assets through M&A deals as they did during the same period of 2013.

According to a recent story in the Wall Street Journal, mergers and acquisitions involving Chinese real-estate firms reached $22.2 billion so far this year, outpacing 2013 by 326 percent. Citing figures from financial information provider Dealogic, the Journal story noted that the level of M&A activity in China’s property sector this year had set a new market record.

Traditional Funding Channels Denied

One explanation for the surge in M&A deals is that access to capital has become a major issue for China’s real estate sector in the face of rising land prices, slackening demand for housing, and tightening credit markets.

The latest figures from the National Bureau of Statistics show that housing sales revenues for the first quarter of 2014 were down 7.7 percent compared to the same period last year, and the rate of price growth has fallen as well, leaving many developers with less income than they may have expected following 2013’s boom year.

A cutoff in lending by banks and a 49 percent drop in loans from the country’s less formal shadow banking sector to real estate firms also put pressure on credit-dependent developers this year. Both the government and private lenders appear to have grown increasingly concerned over the near term prospects of the property industry, which has contributed to the current credit squeeze.

Investors Attracted by Valuations While Others Eager to Exit

The mix of pressures on China’s real estate market has left some investors eager to exit, as others rush in to snap up perceived bargains.

In two of the highest profile deals this year, the family of Asia’s richest man disposed of more than US$1.3 billion worth of properties as Li Ka-shing’s ARA Asia Dragon Fund sold the Nanjing IFC for RMB 2.48 billion (US$398 million) and son Richard Li sold Pacific Century Place in Beijing to Gaw Capital for $928 million. Last year the elder Li pointedly said that China’s real estate market had overheated, and sold three other properties during 2013.

By contrast, Hong Kong’s fifth wealthiest billionaire decided to double-down on his China bets by taking his New World China Land Limited (HKG:0917) private. Cheng Yu-tung’s New World Development Co (HKG:0017) bid HK$18.6 billion (US$2.4 billion) to buy back shares in the company’s China subsidiary as they saw the stock as undervalued.

Also, reflecting the variety of strategies and choices facing real estate companies during the period, one of the country’s most aggressive major developers, Soho China sold off two sites for RMB 5.23 billion ($851 million) during March. Many analysts interpreted the sale of the non-core assets as a way to shore up the company’s balance sheet as the real estate market moved into bear territory.