Weak market, state curbs forcing cash-hungry players to sell assets Merger and acquisition activities in the mainland real estate market are expected to reach a five-year high this year as tightened controls on bank loans and falling property prices put over-borrowed developers out of business, say industry watchers. Faced with difficulties in obtaining loans, dwindling transactions and declining property prices, cash-hungry developers across the country are being forced to offload their assets or sell stakes. Joseph Chee, a managing director at UBS Securities, believes the real estate industry requires up to 1 trillion yuan (HK$1.14 trillion) in capital to complete ongoing projects, make payments for land acquisitions and repay existing loans. Many smaller sized developers with cash-flow problems would be eliminated unless they offered their projects for sale, Mr Chee said. 'This will provide good opportunities for mergers and acquisitions and total deals are likely to be higher than last year,' he said. According to investment bank data provider Dealogic, the value of merger and acquisition deals involving mainland property last year was US$21.01 billion, the highest since 2003. As of Monday, 171 deals worth US$15.29 billion had been announced, up 142 per cent in value from the US$6.31 billion spent on 123 deals over the same period last year. Since the tighter credit market conditions are expected to persist for the next two years, Mr Chee believes that 70 per cent of the mainland real estate market would be controlled by just five to 10 cashed-up developers. Malcolm Tam Yuk-cheung, a financial advisory leader at Deloitte China Real Estate Industry, expects the value of merger and acquisition deals this year to grow 5 to 10 per cent over last year. 'We have received lots of inquiries from investors in the United States and Europe interested in investing on the mainland after seeing a downward adjustment in property prices,' Mr Tam said. 'They are either looking at opportunities for acquiring a stake in a property company or to directly invest in property projects.' These investors typically targeted an average 15 per cent internal return rate before leverage, he said. He cited the case of China Resources Land, which agreed to buy property projects and a furniture business on the mainland from a subsidiary of its parent firm for HK$9.21 billion in cash and shares. Earlier this month, the Hong Kong-listed developer said it would buy the entire issued capital of Smooth Day, which holds a number of sites in Beijing, Wuhan, Chongqing, Shenyang and Dalian, and the Logic Furniture Group, which manufactures and sells furniture. Last month, Hong Kong-listed Soho China said it had acquired mainland firm Kaiheng, which owns a commercial and residential project in Beijing for 5.5 billion yuan. The deal included taking on Kaiheng's 3.3 billion yuan of debt. Hui Wing-mau, the third-richest entrepreneur on the mainland and the chairman of Shimao Property Holdings, hopes to acquire property companies encountering financial problems to speed up its expansion on the mainland. 'We will look for cash-strapped companies that are being offered for sale at a lower valuation,' said Mr Hui. Shimao also would be more selective in acquiring land unless the prime sites were being offered at low prices, he said. The company has a developable land bank of 26 million square metres in 22 cities including Shanghai, Beijing, Wuhan, Nanjing, Shenyang and Dalian. Lina Wong, the managing director of property consultant Colliers International's East China region, said a series of restrictions to curb property investment would make investors uneasy about closing deals. 'Large deals do not easily win Beijing's approval - particularly for foreign companies,' Ms Wong said. However, the latest talk in the market is that the Ministry of Commerce is prepared to make it easier for foreign companies and funds to access the mainland real estate market by allowing them to register investments at the provincial level. 'But it will take about three months from the time such market talk emerges before the amendment materialises. So, the impact of the amendment will probably take effect next year,' Ms Wong said. She was referring to an expected amendment of Circular 50, announced in May last year, which requires a foreign-invested property enterprise to file with the Ministry of Commerce at the national level after receiving approval from the ministry's local office. Without registration, the State Administration of Foreign Exchange and its designated banks will not process foreign exchange settlements for property transactions. The amendment will help boost the ailing market by expediting the processing of transactions and entry of foreign capital.
