Shui On Land backs away from urban renewal projects as debt mounts

The decision by highly geared Shui On Land to speed up its development cycle on the mainland by not taking part in future urban renewal projects could help accelerate its property sales, according to analysts.

The Shanghai-based developer accumulated a debt of 42.12 billion yuan (HK$52.98 billion) as of June, up 20 per cent from December last year. Its net gearing ratio increased to 64 per cent from 59 per cent in the same period.

"The mounting debts are mainly due to the involvement in time-consuming site assembling," said Alfred Lau, an analyst at Bocom International, referring to the process of buying out individual flat owners in a large scale urban renewal project.

Chairman Vincent Lo Hong-sui said last week the firm has invested more than 10 billion yuan in assembling sites. "It puts lots of pressure on our financial position," he said after the company announced first-half earnings fell 24 per cent to 797 million yuan.

The group has invested 14.2 billion yuan in assembling sites with a total gross floor area of 861,000 square metres in two projects.

A total of 283,000 square metres was cleared during the past few months, and construction will get underway shortly.

BNP Paribas expects the sales momentum will speed up in the second half of next year, given more projects in Shanghai would be up for sale following completion of the relocation of existing residents in Rui Hung Xing Cheng and Taipingqiao.

Shui On said it would have 22 billion yuan of properties available for sale in the two projects in Shanghai, Taipingqiao and Rui Hung Xing Cheng, after relocation of the residents was completed.

However, Lo said Shui On would not take part in urban renewal projects in the future due to the huge investment and long pay back period.

Leveraging its expertise in building Shanghai Xintiandi, a landmark retail-entertainment area in the heart of Shanghai, Lo said numerous local governments had invited the firm to help them devise master layout plans for development sites in prime locations.

Andy Chang, associate director at credit rating agency Fitch, said some local governments may need assistance from developers with more experience and funding to do land development.