Zhang Zhaoxing, Chairman of Yuexiu Property
Yuexiu Property announced last week that it plans a HK$3.84 billion ($495 million) rights issue, becoming the second major Chinese real estate developer in a week to turn to the equity markets as slowing home sales continue to squeeze the country’s property companies.
The announcement to the Hong Kong stock exchange by the Guangzhou-based developer comes as slowing sales and falling home prices in China have helped to trigger record levels of international bond sales – and debt – by the nation’s real estate firms.
Yuexiu Joins Rush to Reduce Gearing Ratios
In its statement to the stock exchange, Yuexiu indicated that it would use the net proceeds of the rights issue to improve its net gearing ratio, cash position and availability of working capital to facilitate expansion. The developer had a net gearing ratio of 62.7 percent at the end of June.
The quest for a lower gearing ratio comes as investors increasingly have shied away from developer stocks, and put Yuexiu in league with rivals Shui On Land and Country Garden Holdings who have also been forced to shore up their balance sheets recently as their revenues have not progressed as rapidly as their liabilities.
In June Shui On’s gearing ratio sat at 64 percent, and the developer resorted to selling off two hotels in Shanghai to a sister company after sales in the first half of 2014 fell short of targets. Country Garden, which had a 67 percent gearing ratio in June announced its own HK$3.18 billion ($410 million) share sale plan on August 28th.
Yuexiu’s share sale proposal would price its new shares at HK$1.25 per share, a 25 per cent discount from its close on Wednesday, the day before it was announced. The company said it would sell as many as 3.07 billion shares.
Just one year ago, Yuexiu seemed brimming with confidence when it outbid several rival developers to pay RMB9.01 billion for a plot of land in Wuhan. Yuexiu’s shares have since slid to HK$1.65 per share from Wednesday’s closing price of HK$1.67 per share.
Searching for Financing Among Slowing Sales
Yuexiu, Shui On and Country Garden are among the many developers in China who are finding their finances squeezed since the country’s housing sales began sliding in 2014.
According to figures released by the National Bureau of Statistics in August, sales of new homes fell to RMB 2.98 trillion ($484 billion) during the first seven months of the year, a decrease of 10.5 percent from the same period in 2013. The quantity of housing sold in terms of area also fell 7.6 percent year on year to 564.80 million square meters.
This slowdown, combined with an ongoing reluctance by China’s commercial banks to lend to the real estate sector, has created growing financial pressure for developers.
Just days before Yuexiu announced its share sale, rival Chinese developer Oceanwide Real Estate began shopping a $320 million bond sale. The new bond is part of a wave of debt issuance by China’s real estate developers that has brought borrowing in the sector to historic levels.
According to a recent report by Bloomberg, by mid-year the country’s developers had borrowed $5.9 billion from foreign banks in 2014, up 39 percent from the same period last year. Debt now equals 128 percent of equity among China’s listed developers – the highest level since 2005.
Country Garden Sale Sank Shares
Yuexiu’s rights issue was announced less than one week after Country Garden Holdings announced a similar plan, sending the developer’s stock down 10.7 percent from HK$3.64 when the plan was revealed on August 28th, to HK$3.39 at the close of trading on Friday.
Country Garden, which is controlled by China’s richest woman Yang Huiyan, is offering investors one new share for every 15 held at HK$2.50 each, amounting to approximately 1.27 billion in new shares. The offer is about a 31 percent discount to the price of the company’s stock before the plan was announced.
The company said that the discounted share sale, which apparently does not require the approval of shareholders, was necessary to refinance existing debt, including bonds maturing this month.
The moves by Country Garden and Yuexiu are likely to make investors more skeptical of mainland developer stocks in general, as the current slide in the housing market is expected to last at least through the end of 2014.
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