China’s largest property developers have built a war chest of more than US$25 billion in cash through bond sales and loans, in a sign that competition for land – and among China’s property companies – is heating up.
Firms including Shimao Property and Greentown China used offshore bond sales and loans to boost their cash reserves by more than $16 billion from January through the end of August this year. This burst of offshore fundraising marked an approximately 36 percent increase compared to the same period last year – according to a recent report by Reuters.
However, Reuters makes the leap from developers raising money to the spectre of new government restrictions and a potential market downturn – two possibilities which are contradicted by a number of recent government statements as well as by overall market trends.
While Reuters cites its own data to predict that “China’s real estate management and development companies’ total capital expenditures are expected to fall 11 percent in the next 12 months,” these estimates do not hold up in the face of recent land sales data – the major element in developers’ capital expenditures.
Land Sales Jump in 2013
According to the Ministry of Land and Resources, China’s local governments raised 49.5 percent more money from land sales during the period from January to July this year than they did during the same period of 2012. This increase of developers’ capital expenditures for land from RMB 1.35 trillion to RMB 2.02 trillion, indicates that these companies are becoming more aggressive, rather than hunkering down in defensive positions.
The aggressive stance of developers is further clarified by the record land prices paid at recent auctions, with Sunac paying RMB 2.1 billion for a 28,100 square meter site in Beijing and Hong Kong real estate developer Sun Hung Kai bought a plot in Shanghai for a record RMB 21.77 billion during this month.
Although Reuters contends that, “they (developers) have turned more cautious about investing, leaving much of that money on their balance sheets,” there are a lot of reasons for keeping cash on your balance sheet. Among the most obvious rationales for stockpiling cash, if you are developer, is for buying land or acquiring other companies.
It has already been shown that competition for land has heated up during 2013, and as long as the government continues to turn a blind eye to rampaging home prices, this competition is likely to continue.
Offshore Financing Picking Industry Winners
The rise in offshore financing for real estate companies in China has been dramatic this year, with Greentown already having raised $1.1 billion via offshore bonds, and other developers have been active as well.
Among Hong Kong-listed developers, Guangzhou-based Agile Property Holdings Ltd has raised RMB 12.88 billion from overseas notes and loans, China Resources Land Ltd has raised around RMB 9.35 billion, and China Overseas Property Ltd has garnered RMB 17.38 billion.
Andrew Slevin, Managing Director of boutique cross-border real estate investment consultancy Silver & New, and until recently the East China Regional Managing Director with CBRE, explained the trend towards overseas borrowing as a unique opportunity for companies that had access to this cash.
“The developers went to the markets in Hong Kong and Singapore at a perfect time when the perception was that the China residential property market was recovering and that the economy was healthy,” Mr Slevin said. “As a result they were able to raise significant funds at lower costs than would be possible domestically.”
And this overseas funding advantage, combined with raising land prices, will contribute to continuing consolidation among China’s real estate developers this year, as companies without access to overseas financing struggle to compete in an industry where profit margins are under pressure from the higher costs of land acquisition.
Crackdown? What Crackdown?
While each developer will have their own plans for 2013 and their own justification for the arrangement of their balance sheet, Reuters’ argument that real estate companies are bracing for a regulatory crackdown seems hard to justify in the light of recent events.
The report states that “With land prices hitting record highs and authorities renewing their push to rein in house prices, the developers’ cash hoards may well prove crucial in a sector where margins are coming under pressure,” there is little evidence of the government taking a firm hand against rising home costs.
Not only did August data show prices rising at least 15 percent year on year in China’s first tier cities, but the government has been doing its best to pretend this isn’t happening.