China Fund Squeeze Has Chan Seeing Bankrupt Developers as Hang Lung Spends
Hang Lung Properties Ltd. (101) Chairman Ronnie Chan said some big developers in China are struggling to get funds and smaller ones may go out of business, spurring opportunities for financially stronger companies.
Hang Lung, with HK$27 billion ($3.5 billion) of cash, is investing as much as HK$50 billion in mall projects in Chinese cities and is “warming up” to more developments, Chan said yesterday at a Bloomberg conference in Hong Kong.
“Lots of companies are in far worse shape than people think,” Chan said. “Even the big guys may not have enough money because they have borrowed a lot. The situation is such that the smaller players will go out of business.”
Chinese developers are facing an “increasingly severe” credit outlook that may force them to cut prices and borrow on higher interest rates, Standard & Poor’s said in a Sept. 27 report. The government increased down-payment requirements and mortgage rates on some homes this year and issued housing purchase restrictions in about 40 cities.
China’s home prices gained in fewer than half of the 70 cities monitored by the government in September for a second month as sales eased with the curbs. Chongqing, one of the only two cities the government imposed property taxes in this year, posted the steepest decline in home prices last month as prices dropped 0.4 percent from August.
Shares of Hang Lung rose 0.9 percent to HK$27.65 at the close of trading in Hong Kong. The city’s third-biggest developer by market value has declined 24 percent this year compared with a 21 percent decline in the Hang Seng Property Index, which tracks seven of the biggest developers in the city including Hang Lung.
‘Lukewarm’ Property Market
Some of the smaller developers that can’t raise funds to complete their projects are either selling their land or unfinished projects to larger property companies, according Jing Ulrich, Hong Kong-based chairman of global markets for China at JPMorgan Chase & Co.
“The situation in the property market now is lukewarm,” she said at the Bloomberg conference. “We’re seeing a lot of consolidation taking place. In two to three years’ time, we’ll see the sector being much more concentrated.”
Hang Lung is “financially capable” of doubling its investment in China, Chan said in August. It opened a 3.5 billion yuan ($550 million) shopping mall that month in the eastern Chinese city of Jinan, its fourth outside of Hong Kong.
The developer last month bought two sites in Kunming in southwest China for 3.5 billion yuan, its first land purchases in the country since May 2009. Chan said yesterday the properties attracted six developers in June, and had only two bidders by September.
“It’s amazing the market in China has been going on for 20 years yet there’s still not a major developer going into bankruptcy -- this is unheard of anywhere in the world,” he said. “When the bear market comes and nobody has money to buy, then those with cash would prosper. That’s why the longer and the more severe the bear market is, the better it is for us.”
The developer is expanding in China as the number of millionaire households increases, jumping 31 percent to 1.11 million in 2010 from a year earlier, according to a Boston Consulting Group survey. Demand for retail space helped drive a 42 percent surge in commercial real estate investments in the country last year, according to Cushman & Wakefield Inc.
Chinese consumers will be the world’s largest luxury spenders by next year, according to an HSBC Holdings Plc report in August. The nation’s retail sales climbed 18 percent in September from a year earlier and rose 17 percent in the first nine months, the statistic bureau said.
Overtaking Hong Kong
Hang Lung’s rental income from China will “almost certainly” overtake that of Hong Kong next year, Chan said in August. The company is targeting Chinese cities with per-capita income of about 40,000 yuan for future projects, he said.
Hang Lung hasn’t bought any land in Hong Kong in at least 10 years. Home prices and transactions in the city have been falling as equities drop, mortgage rates rise and the government boosts land supply to quell a surge in apartment values.
The government has sold four sites since August for less than analysts estimated, and prices may decline 10 percent over 12 months on higher mortgage rates, Colliers International Executive Director Simon Lo said this month.
The government has in the past year raised minimum down- payment requirements and increased land supply after home prices surged more than 70 percent since early 2009.
Record low mortgage rates, a lack of new supply and an influx of buyers from other parts of China helped fuel the price surge. Chinese buyers accounted for 51 percent of the city’s new home sales by value in the third quarter, up from 37 percent in the previous three months, Centaline Property Agency Ltd. said yesterday.
Chan said yesterday Hong Kong is finally “getting it right” with recent land sales, and he expects Chinese buyers to focus on the city’s high-end properties.
“Mainland money coming to the Hong Kong property market is an irreversible trend,” he said. “The only solution is to adopt an appropriate land supply policy.”
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