Guangdong and top-tier cities at centre of Kaisa’s strategy
Tam Lai-ling, a former investment banker and now vice-chairman of Kaisa Group Holdings, has applied his financial management skills to help the firm withstand the market downturn
Tam Lai-ling has steeled the mainland developer for a market downturn with a strategy that relies on highly profitable urban redevelopment projects in Guangdong province and housing demand that continues to be strong in the country's top-tier cities.
The former investment banker had worked at several other mainland developers as chief financial officer before moving in 2010 to Kaisa Group Holdings, where he is a vice-chairman and an executive director.
How many redevelopment projects has Kaisa done, how much do they contribute to the company's overall revenue, and what are the profit margins, compared with its other projects?
We have been doing redevelopment projects for many years. Guangdong issued a new policy in 2009, so the guidelines became clearer.
Our classic project is Kaisa City Plaza (a residential and commercial complex in Shenzhen). It was originally a factory, which closed down, and has a site area of more than 300,000 sqmetres. The saleable area is about 1 million sqmetres now.
It is so far the biggest redevelopment project in Shenzhen.
Kaisa City Plaza will bring us revenue of 5 billion yuan (HK$6.24 billion) from sales of 200,000 sqmetres each year. This project itself contributes a sixth of our sales revenue in Shenzhen.
We started presales at the end of 2012, and the project has been the best-selling in Shenzhen since.
Prices at Kaisa City Plaza increased last year from about 20,000 yuan per square metre to 25,000 yuan per square metre and have stayed largely unchanged this year.
In the next few years, several of our redevelopment projects will get government approval [for presale].
Our profit depends on the plot ratio granted by the local government. If the existing plot ratio is five, the government is unlikely to give you a new plot ratio substantially higher that that. In that case, we cannot do the project.
We have signed redevelopment agreements with villages covering a total of 12 million sqmetres of space, with 7 million in Shenzhen and the rest mostly in Guangzhou.
In the next five years, redevelopment projects will stay at 25 to 30 per cent of the company's total sales revenue.
How will the company increase its participation in Shenzhen's urban redevelopment plan? And what advantages does it have that are not shared by other developers? Is your company expanding into other cities?
We do redevelopment projects only in Guangdong. The projects must be in first-tier cities with scarce land supply.
Why would a third or fourth-tier city need to do redevelopment projects when they have plenty of unused land?
Shenzhen is a manufacturing base, but many factories have been moving inland for cheaper costs, leaving behind old sites. Some factory owners have approached us and asked whether we could use their sites for redevelopment projects. The industrial upgrading of Shenzhen gives us the opportunities.
Redevelopment projects have their own merits. The challenge is it takes quite a long time, and the developer must be familiar with local city planning and government approval procedures.
In the past few years, many developers pledged to participate in redevelopment projects, but only a small number of them are truly doing it now.
We have very good experience, and sometimes local governments will listen to our advice on city planning.
Negotiation with villagers is a tough job. But if we think the project is doable, we will involve a lot of resources. We have a dedicated, experienced team of more than 300 people. And we know these villages very well.
What do you think of third and fourth-tier cities versus first and second-tier cities?
About 70 per cent of our sales are in first and second-tier cities. But projects in third and fourth-tier cities also have value.
Next year, first and second-tier cities will make a greater contribution to our sales, as we will start to sell several projects in Guangzhou.
First-tier cities enjoy strong demand, but presale conditions are very harsh. For example, the developer must top up the whole building. Presale price control is also strict. The time span from land purchase to presale is longer than in second-tier cities.
Third and fourth-tier cities offer thin profit margins, but the investment often does not involve a lot of money. You can start selling projects when they are still on paper. And buyers are usually upgraders who already have homes. They can pay fully in cash if the price is good.
The adverse side is there is only so much demand. The first phase of a project can sell very well, but demand in the second phase can peter out.
In first and second-tier cities, projects can sell well if prices are at an appropriate level. What developers are most worried about is that even if they cut prices, buyers will not come back.
Currently, bank lending is strict, affecting buyers' sentiment. Purchase restrictions will be loosened sooner or later.
Moody's upgraded its rating for Kaisa last month in recognition of the company's strong sales execution and debt structure optimisation. Do you have further fundraising plans this year?
We have optimised our debt structure. Through our liabilities management last year, we lowered our funding cost from 10 per cent to about 8 per cent, and we extended the maturity of our debts from two years to between three and seven years.
We have no [fundraising plans in the second half], but we will look at market conditions to see if the price is cheap.
What do you think of Sino Life Insurance's purchase of more Kaisa shares recently?
Sino Life knows us very well, including where our land reserves are. They think our equity price is cheap.
We bought a land parcel together with Sino Life in Shenzhen in April, the biggest plot ever in the city, covering an area of 860,000 sqmetres.
We paid 5.4 billion yuan and will develop it as a tourist attraction. Kaisa holds 51 per cent of the joint venture, while Sino Life owns 49 per cent.
Sino Life's investment in our company is different from that of other domestic insurers in other developers, such as Gemdale and Financial Street. These developers do not have a controlling shareholder, while Kaisa has. (Chairman Kwok Ying-shing and his brothers own more than 60 per cent of the company.)