Safe as houses?

High-rise, but highly leveraged

As the old saying goes: when it rains, it pours. After a hiatus, China’s capital-hungry property developers are now flooding the Hong Kong stockmarket with initial public offerings. Between September and October, five property firms have gone public, with at least two more scrambling to list before the end of the year.

But investors are saying ‘Enough!’ The latest victim of the deteriorating market for property-related IPO is Excellence Real Estate. The Shenzhen-based developer, which was scheduled to price its offer last week, scrapped its plans to raise $1 billion.

“In view of the current market conditions… and with the investors’ best interests in mind, [we] decided not to proceed with the global offering under the original timetable,” Chairman Li Wa said.

The deal represents a major blow for Morgan Stanley, one of the bookrunners of the deal. The American bank has prided itself on never having pulled an IPO in Asia.

To avoid a similar fate, Fujian-based Yuzhou Properties priced its own IPO at the bottom of the indicative range, for a total deal size of $209 million.

Similarly, Mingfa Group, which is scheduled to start trading this week, revised its IPO targets from a maximum size of $440 million down to $335 million.

Even big names like Evergrande Real Estate Group have failed to attract much interest. The Guangzhou-based property developer raised $762 million, much smaller than the $1.5 billion it was once hoping for. According to FinanceAsia, Evergrande sold 1.61 billion shares at HK$3.50 (45.2 American cents) each, representing 5.5 times estimated 2010 earnings.

But IPO fatigue should hardly be surprising. “There is just too much supply [of new property shares], and recent listings in this sector are already under water,” Paul Pong, managing director at Pegasus Fund Managers, told the South China Morning Post.

Which begs the question, why the frenzy in the first place?

Some developers are desperate for cash. Mainland players are generally highly leveraged. During the financial crisis, many took out high-interest short-term loans from investment banks and private equity funds. Now they want to go public to raise money to repay debts.

That is certainly the case for Evergrande and Glorious. Credit Suisse lent Evergrande $430 million in August 2007 on the condition that the firm would float its shares by the end of this month.

Likewise, Goldman Sachs and Deutsche Bank offered a bridge loan with a 23.5% interest rate in October 2007 to Glorious in expectation that an IPO of the company was only a few months way, says the Wall Street Journal.

Glorious came close to launching an IPO in June 2008, but backed off as investor demand waned.

Cash-strapped developers are also finding it harder to borrow, and many have committed to construction projects that are due to start soon.

“They have to come to the market because they need the cash to fund their projects. It is not the best moment but many of them don’t want to wait any more,” says Carmen Wong, corporate finance officer at Phillip Securities, a Hong Kong brokerage.

All eyes are now on Longfor. Undeterred by the lacklustre response to the recent IPOs, the Chongqing-based developer is pressing ahead on its Hong Kong listing. It hopes to raise as much as $1.05 billion.

Analysts seem to be optimistic. Compared to some of its peers, Longfor is an attractive buy, with a strong brand name and significant market share in Chengdu and Chongqing – areas that are prioritised by the government in terms of development and growth.

Longfor is also in the process of transforming itself into a nationwide player with projects in Beijing and Shanghai.

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