Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Hong Kong's aging billionaires have been reducing investments in China as the economy's prospects dim. The latest sale, by New World Development's Cheng Yu-tung, has a whiff of desperation.

The 90-year-old is selling 20.4 billion yuan (US$3.2 billion) of property projects owned by his private and publicly traded companies to Evergrande Real Estate Group. That brings to more than $5 billion the amount of real estate Cheng-controlled companies have sold to the indebted Chinese developer in a matter of weeks, after a 13.5 billion yuan deal agreed earlier this month.

New World Development said it will book gains on the disposal of the projects it's selling in the cities of Guiyang and Chengdu, for which Evergrande is paying 7.3 billion yuan. Still, the sales also have shades of a giveaway. Evergrande has the distinction of being among the most leveraged property firms in China. Its net debt-to-equity ratio reached a record 121.8 percent at the end of June, well above the 83 percent for other Hong Kong-listed real estate companies. Evergrande's total debt-to-equity ratio also exceeds the average for developers traded in Shanghai.

Evergrande's Higher Debt Burden
The property company's debt-to-equity ratio exceeds the aggregate for listed Chinese real estate
Source: Bloomberg

Evergrande's debt profile might be no cause for concern, were Cheng's companies receiving cash. Instead, the company will pay just 1.5 billion yuan up front for the Guiyang and Chengdu projects, with the remainder financed by perpetual bonds sold to New World. 

The Chinese developer is paying a coupon of 9 percent on the securities. That's higher than the 7 percent proposed initially, though an option to convert the bonds into equity was removed. Evergrande has an existing five-year dollar bond that pays 12 percent.

Evergrande has been a leading issuer of perpetual bonds, which were allowed by China only in 2013 and which tend to be shunned by fund managers despite their high interest rates. The securities never have to be repaid and are classed as equity. Counting them as debt, Evergrande's net debt to equity ratio at the end of June would have been 292 percent.

In its Dec. 29 stock exchange filing, Evergrande noted the favorable prices and ``favorable term of payment'' for the Guiyang and Chengdu projects. Chinese brokerage CICC was less sanguine, saying the acquisition ``would further add to the cash-flow uncertainty and debt-serving obligations'' of the company.

Controlled by Hui Ka Yan, one of China's richest men, Evergrande has been on an acquisition spree. Its purchases include the record $1.6 billion it paid last month for a Hong Kong office tower owned by Chinese Estates, the flagship firm of Joseph Lau, another of the city's billionaires.

Cashing Out of Property
Source: Bloomberg

For its part, New World said the disposals would enable the group to realize cash and further its strategy of scaling down investment in second- and third-tier cities.

Add it all up, and the impression is of a company that was keen to sell and didn't have any better options. Why accept payment in the form of an eternal IOU from an already over-indebted company if there was a buyer willing to pay cash?

Like fellow Hong Kong tycoon Li Ka-shing, who has also been selling assets in China, Cheng may be motivated partly by a desire to rationalize his empire before the next generation takes control. Chinese property prices have risen this year, though gains have been focused on big cities. A deal on these terms suggest that Cheng's faith in the outlook for Chinese real estate is rather less enduring than those securities he just accepted.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net