 |
| Pan: Chinese Real Estate Market Will See Drastic Changes in 100 Days |
|
|
|
|
High profile property commentator, Mr Pan Shiyi, Chairman of SOHO China, forecasted that due to the double whammy of international credit market crisis and tightening domestic monetary policy, many Chinese real estate companies will experience drastic changes in 100 days' time, and enter an unprecedented period of financing difficulty.
Property funding difficulties
The fact that many mainland China real estate companies have recently pulled out their IPO plans on Hong Kong Stock Exchange (HKEX) is now showing its effects, and the phenomenon of "Weird Cycle of Price shuffling between property and share markets by real estate companies", first reported by Shanghai Securities News, is now becoming a vicious cycle.
Almost at the same time, the China Securities Regulatory Commission (CSRC) announced that while it will still support quality real estate companies to raise expansion capital through IPOs or backdoor listings, it will now disapprove IPO plans that specifically aim to corner lands and housing supplies and purchase developable lands.
On one hand it is the financing difficulty for companies that want to corner lands and repackage them for stock market listing, on the other is the government measure that prevents convergence of risks between share market capital and land assets. Therefore the so-called "Weird Cycle" may burst sometime earlier. The essence of "Weird Cycle" is that a developer first corners land resources with debt, and then uses this land asset to launch an IPO to raise share capital. The IPO receipts will then be used to repay the borrowed money or corner more lands with further borrowing. This is a vicious cycle purely built on capital market strength. If investor becomes less confident and stops supporting such financing schemes, the developer's well-constructed funding chain will be broken instantly. |
|
|
|
|
|
In addition to investor confidence, the Chinese government is also tightening the domestic real estate market and banning land-cornering IPO plans. As a result, those capital-deficient developers are starting to dump their property portfolios, causing further price weakness in the property market of China.
Clearly, the Chinese real estate industry has now become a dangerous place to be in such a sensitive period. Industry experts pointed out that since the beginning of 2008, there had been more than 40 real estate companies from mainland China lining up to conduct overseas IPOs, which amounted to US$20 billion. "The delay of IPOs on HKEX by mainland property companies is a symbolic event, which means the flow channel between international capital market and Chinese real estate financing is now narrowing. And due to the pressure of inflation in China, the government will continue to adopt a tightening monetary stance, such as the most recent lifting of bank capital reserve ratio requirement. Therefore the whole real estate market in China is now facing tremendous funding pressure," said Mr Pan.
Pan also pointed out that "The current situation in the international capital market is very bad, and events such as the failure of Bear Sterns have led to a confidence deficiency in the market. Because China's economy is now closely connected to the international economy, we will no doubt see further negative impacts on the Chinese domestic market."
"In 2008, Chinese real estate companies in general will be facing very tough financing environment. The next 100 days will be a time when drastic changes take place in many property companies." Pan suggested that developers may try resolving to other funding methods after the IPO failures, but it will still take some time to figure out what exactly the direction will be. The possible obstacles faced by a typical real estate company currently include: whether gearing ratio is at a dangerous level; whether product positioning fits market demand; whether products will be in conflict with affordable housing products; competition between residential developers in the same product segment; how to deal with the demand under the tightened lending environment, etc.
Subprime crisis shadowing Asian property markets
"The US subprime crisis and subdued Asian stock markets have dramatically changed the risk assumptions in Asian property markets, as many REITs (Real Estate Investment Trust) are now liquidating their portfolios to reduce gearing," said Mr Tan Buck Koon, a former analyst from OCBC Bank of Singapore.
Tan added, "The US subprime crisis will drag down the whole Asian economy. Apart from already hammered Asian manufacturing and financial industries, the real estate markets cannot be immune." Due to subprime crisis and global equity market slumps, Asian property markets are now showing signs of weakness, and it is expected that overall transaction volume and prices will both slump in the next few months.
Correction, not recession
Against the backdrop of the gloomy but popular theory of "inflection point of the property market", another high profile property commentator, Mr Wang Shi, Chairman of China Vanke Group, said that currently in mainland China, especially in the Pearl Delta Region (mainly Guangdong Province), housing prices are retreating in a rational manner. It doesn't necessarily imply a big slump, and the Chinese real estate market will not turn from bull to bear like the current Chinese sharemarket.
Although the Chinese sharemarket is not performing well lately, Wang doesn't think that it will lead to a substantial increase in property turnover volume in China. The tightening monetary policy and reducing liquidity can just keep the property market in a correction and consolidation state. In this circumstance, Wang's Vanke Group, one of the biggest privately own property companies in China, will seize this opportunity to acquire residential development projects from quality companies, in order to maintain its targeted annual return-on-asset level of 15%.
Produced by China Business Intelligence; Source: Shanghai Securities News
|
|
| < Prev | Next > |
|---|
