Yuexiu rides bullish mood with 6.45b yuan Guangzhou land purchase

The bullish mood on the stock markets after the mainland's first cut in interest rates in more than two years spilled over into the land market yesterday, with a Guangzhou developer paying 6.45 billion yuan (HK$8.1 billion) for a site in the city.

The purchase by Yuexiu Property of the site in Tonghe district marks the first major acquisition in the mainland land market since Friday's unexpected rate cut.

Property stocks were among the biggest gainers yesterday as the Hang Seng Index gained 1.95 per cent in the market's first response to the cut of 40 basis points in the one-year benchmark lending rate to 5.6 per cent.

Shares in Yuexiu jumped 7 per in heavy trading cent to close at HK$1.52.

China Communications Construction, a state-owned builder of transport infrastructure, saw its shares soar 13 per cent to HK$7.76 and hit the 10 per cent daily limit in Shanghai as investors pushed up the price in anticipation of a major announcement.

After the Shanghai market closed, the company said it planned to raise up to 14.5 billion yuan by issuing preferred shares.

For Yuexiu, which raised HK$3.8 billion in a rights issue in September, the acquisition will boost its land bank to 15.72 million sq metres.

China Communications Construction said it would use the proceeds from the sale of no more than 145 million preferred shares for work on projects including highways and ports.

While major developers such as Yuexiu are acting to strengthen their position, smaller, less efficient players with lower economies of scale are likely to see their competitiveness further eroded, according to Fitch Ratings.

The polarisation within the mainland's property sector was set to intensify over the next 12 months, the ratings agency said.

Taking into account the oversupply in some smaller cities and limited increases in home prices, fast turnover of assets would be important for developers to maintain their business scale and liquidity to sustain their credit profiles, it said.

Fitch said it expected the larger and more established players would continue to increase asset turnover to improve cash flow. That would also lead to higher contracted sales.

The top five developers' share of accumulated sales had expanded from about 8 per cent at the end of last year to 11 per cent in September, the agency said.

But it said government policies would help weaker developers survive and thereby slow the much-needed consolidation in the industry.

Analysts said the rate cut by the People's Bank of China would lower financing costs and should reduce funding pressure on developers with high levels of domestic borrowing.

Credit Suisse said developers with high levels of domestic debt should benefit from the move, with firms such as Guangzhou R&F Properties and Sunac China Holdings likely to see short-term rallies in stock prices.

However, because the current inventory situation is much worse than during the previous interest rate cut cycles, it said the housing market would remain flat next year and developers with a stronger capability to sell down inventory were likely to be better bets beyond the short term.