M&A activity of Chinese property management firms poised to jump this year amid rush to raise much-needed cash
- The number and value of mergers and acquisitions in the property management segment will jump as much as 30 per cent, says CGS-CMBI Securities
- Financially healthier developers continue to list their property management arms to pursue acquisitions
Meanwhile, their healthier peers are poised to tap capital markets to raise the funds to buy some of their offloaded assets.
The once high-flying property management segment, meanwhile, is being closely watched by investors after the valuation of their stocks was halved by the end of 2021.
“This year’s IPOs are derived from the last several years’ boom of the property management industry, supported by favourable government policies,” said Tang Xiaochen, director of the property management department at the China Real Estate Information Corporation (CRIC), a consultancy. “Developers list these units to have another financing channel.”
Mounting pressure to consolidate has also stimulated larger developers to increase their M&A activities to safeguard their positions, he said. Companies with liquidity problems rushed to dispose of their property management units as financing and refinancing channels were restricted amid the slump in sales and strict government policies in China.
At least 150 such M&A deals were struck last year at a total value of 40 billion yuan (US$6.3 billion), with the number of large transactions rising, according to data from CRIC. Country Garden Services’ 10 billion yuan acquisition of R&F Property Services was the largest single deal in the sector’s history.
IPO applications by property managers also surged to a record high of 34 in 2021, compared with 19 in 2020 and nine the year before that.
Their peers’ performance in the stock markets, meanwhile, was disappointing. The Hang Seng Property Services and Management Index, which tracks the 30 largest players in the segment, had plummeted 85 per cent as of Tuesday since it was launched in April last year, according to Bloomberg data.
Although the valuations are not ideal amid low investor confidence, higher-quality property companies such as Vanke and Longfor were aiming to expand their range of financing options and boost growth of their subsidiaries.
“That means they need money to further expand their portfolio and prepare for surging M&A opportunities ahead,” said Cheng.
He expects Longfor Intelligent Living’s market capitalisation to reach US$10 billion, based on 26 times its price-to-earnings level. He forecast earnings per share across the property management segment will be around 20 to 30 times in the next three to five years as the growth of the units is likely to be increasingly decoupled from the developers.
“Developers will be more cautious and their standard for ideal M&A targets will be higher in a tough environment,” Tang said. “The methods of M&A will be more versatile, they may be more likely to keep a certain stake in the property management unit to maintain their position in this segment.”