Chinese developers see extra value in a Hong Kong listing
The city allows property companies access to the equity and bond markets as well as the ability to do more with the money raised
Eight mainland property developers have spent more than HK$8.88 billion to secure back-door listings in Hong Kong, and there is no sign of the trend slowing down. Why?
The usual answer is they are desperate for cash because Beijing has barred developers from raising money in the equity and bond markets since 2010.
If that is the case, the acquisitions should have stopped as Beijing quietly began relaxing its grip since July. Several Shanghai-listed developers have been allowed to issue corporate bonds while three have made share placement plans public.
However, they have not. Two weeks ago, the country's largest food trader and processor, Cofco, announced a plan to inject HK$14.17 billion worth of mainland offices and hotels into its newly acquired Hong Kong-listed unit, Hong Kong Parkview.
Since the injection is being done only 14 months after its acquisition of Parkview, it will be treated as a new listing, which means tighter scrutiny and a longer wait before substantial fundraising can be done.
Two other state-owned developers - China Merchants and Shanghai government-owned Greenland - are also making asset injections, worth more than HK$7 billion in total.
These major state-owned enterprises will have little trouble borrowing money if Beijing has indeed lifted the bar on financing or securing priority if that is the case.
Yet, they are sticking to plans for building Hong Kong platforms. The big boys talk about the importance of a Hong Kong listing in expanding their overseas portfolios.
That is not good enough to justify a back-door listing. Your columnist asked a medium-sized developer about that. "Money here is different from money there" was his answer.
Listing in Hong Kong gives a developer access to not only the equity market but also the bond market. What matters here is not only the significantly lower interest rate of an overseas bond or loan. It is about how the money can be used.
In a country where owning a house is the aim of most people, land bank is the lifeblood of a developer. This is, at its heart, a battle about how much money you have to acquire land.
In Hong Kong, that is not an issue. You secure a piece of land at auction. Then you go to the bank for a loan to pay the land premium. On the mainland, that is not the case. Land premium has to be paid with your own money. Controls on using bank loans are so tight that quietly moving money from your credit line to pay the land premium is out of the question.
You secure a piece of land at auction, pay the land premium and get a certificate proving that. With the certificate, you can now get a loan from the bank. The money will be put into a designated account which can only be used for construction purposes. Show the proof that you have bought a tonne of cement and the bank will then pay the cement factory.
You may get around it with bribes. But graft involving developers is the top taboo. The chance of success is slim.
A back-door listing in Hong Kong throws you a line in choppy seas, even though you do not get to raise any meaningful money until the expiration of the two-year freeze, during which any substantial acquisition will be treated as a new listing.
However, once you are listed, you have access to the overseas bond market. The money raised will be sent home to become equity in your various development companies and pay the land premium.
Why is there a difference between foreign and local lending? "Because it is outside China," said the developer. He means there is less checking.
Don't take this as a technical or opportunistic explanation. Rather, it is an example of the "flexibility" that a Hong Kong listing provides for a developer walking through the mainland's policy minefield.
When it comes to flexibility, it is always better to have it sooner. "Back-door listing is the fast lane," said the developer. As long as you have money, you can do it. Stamps from state ministries are required when you do the asset injection.
For the flexibility, he said HK$300 million for a shell was money worth spending.
But isn't Beijing loosening its grip on finance for developers? "They can say yes today and say no tomorrow," he said.
Unlike his predecessor, who emphasised the use of administrative measures to control property prices, Premier Li Keqiang has so far said little on the rising house prices.
One can read this silence as a "no" to administrative control or interference in the property market. Yet, it also leaves Li room to do an about-turn should things get out of hand.
"You have to get prepared, be it winter or spring … that's the lesson we have all learned from the three-year ban," the developer said.