Yuexiu Property maps growth path

After taking aggressive step of injecting core asset into reit platform, Guangzhou developer continues to pursue nationwide expansion

PUBLISHED : Monday, 19 November, 2012, 12:00am
UPDATED : Monday, 19 November, 2012, 4:22am

Yuexiu Property failed to attract much attention from investors in the past few years despite revealing in 2009 its plan to be a nationwide developer.

That was until about six months ago, when the company announced the aggressive step of injecting its core commercial asset - Guangzhou International Finance Centre - into its 35.58 per cent-owned Yuexiu Real Estate Investment Trust for 13.44 billion yuan (HK$16.7 billion).

"It was a very bold move, but a very successful one," said Zhu Chen, a deputy general manager of Yuexiu Property.

The transaction had unlocked the values of the two companies and let them grow, Zhu said.

In July last year, when the proposal was first discussed internally, all the senior executives thought it would be very difficult to achieve, he said.

The injection plan, as expected, attracted controversy when it was announced. The proposal, initiated by the core management team led by chairman Lu Zhifeng, was to inject Guangzhou IFC into Yuexiu Reit, whose assets amounted to less than 7 billion yuan. Market observers described it as a snake-eats-elephant deal, a Chinese idiom referring to the small taking over the big.

To partly finance the deal, Yuexiu Reit raised about HK$3.2 billion through an issue of new units in September. That resulted in an immediate dilution of distribution per unit for investors.

But Zhu said it was a win-win deal for both companies. The concern among Yuexiu Reit's unitholders arose from their misunderstanding of Guangzhou IFC, he said. "They thought Yuexiu Reit would buy a low-return property, and as a result that was not good for the company."

Guangzhou IFC is the 10th-tallest building in the world and is a premium mixed-use commercial development with a total gross floor area of 457,357 square metres. The project comprises a 58-storey grade A office building, a five-star hotel with 344 rooms, a luxury serviced-apartment tower comprising 314 units, a six-storey shopping centre and 1,700 parking spaces.

"It is a prime property in the core area of Guangzhou," Zhu said.

Yuexiu Reit's portfolio had been largely upgraded after the transaction and should have huge growth potential, he said.

"The two companies provide a twin platform. Yuexiu Property will continue to inject office and retail properties into Yuexiu Reit to speed up the reit's growth. By reaping cash from the sale of assets, Yuexiu Property will be able to expand its property development business with a sound and strong cash flow," he said.

Analysts said Guangzhou IFC was still at an early stage of operations, with office occupancy at 60 per cent in July but close to 70 per cent early this month. The hotel and serviced apartments opened in the third quarter.

More than 90 per cent of the shareholders in the two companies voted for the proposal on July 23. Shares in Yuexiu Property have since risen 21.74 per cent, while Yuexiu Reit fell 2.89 per cent.

Yuexiu Property, formerly known as Guangzhou Investment, was listed in Hong Kong in December 1992 as a red chip. Its substantial shareholder, Guangzhou Yuexiu Holdings, is under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou municipal government. In 2009, the firm reorganised by disposing of non-property assets to become a property developer with a name change. It is the only listed mainland developer that owns a listed reit platform in Hong Kong.

Looking ahead, "our plan is to inject one property [into Yuexiu Reit] every one to two years", Zhu said.

The second property to be injected could be Guangzhou Fortune World Plaza, with a total gross floor area of 260,000 sqmetres. Taking into account the market value of 30,000 yuan per square metre in the neighbourhood, the property's estimated value is between 7 billion yuan and 8 billion yuan. An injection could occur next year or in 2014, Zhu said.

With its improved cash flow, Yuexiu had been active in buying land, he said.

According to a CIMB Research report, the Guangzhou IFC deal has helped Yuexiu increase its cash holdings by 4.9 billion yuan and rid itself of 4.5 billion yuan of bank loans.

Zhu said the company continued to pursue its goal to be a nationwide developer and now had properties in nine cities.

It has set a target of 20 billion yuan to 25 billion yuan in contracted sales by 2015, up from its internal target of 12 billion yuan this year. In the first 10 months, the aggregate value of contracted sales was about 11.57 billion yuan, with a gross floor area of 952,200 sqmetres.

Zhu said the firm was interested in expanding in cities such as Qingdao and Dalian in the north, Kunshan and Hangzhou in the Yangtze River Delta and cities in Sichuan province in the west. In the south, it hopes to strengthen its presence in Guangzhou. It also has its eye on Hainan.