By staff reporter Zhang Yingguang

At a time when most fund managers and investors in Hong Kong were vacationing overseas or enjoying the Olympic Games in Beijing, real estate developer Chongqing Longhu Real Estate Development Co. Ltd. launched its road show in Hong Kong to stir excitement for an initial public offering (IPO).

“It is quite strange that they would do the promotion when everybody is on holiday,” said a source from an investment bank. While speculation varies over Longhu’s possible strategies, the source pointed out one, unambiguous factor: “The only reason for Longhu to list in a hurry is the need for capital.”

According to a report issued by Financial Research Center of Beijing Normal University, China’s real estate industry will see an overall capital shortage of more than 400 billion yuan this year.

Under the tight credit controls of the past half year, developers are desperately searching for a means to boost capital through a broad range of methods, including going public, refinancing, bond issuance, selling projects, or even by quitting existing deals. However, few have managed to alleviate the pressure of shortened funds.

Listing in a Hurry

On May 26, Central China Real Estate Ltd. raised HK＄ 1.37 billion in its Hong Kong IPO, becoming the first property firm from the mainland to list in Hong Kong this year. Although the funds raised were much smaller than expected, Central China’s successful IPO encouraged Longhu to launch its listing plans and set a financing target of US＄ 1 billion.

However, market analysts predict that Longhu’s IPO will be an even more scaled-down version of what happed to Central China. “If Longhu plans to list in September, (the funds raised) may shrink by at least 15 percent,” a Hong Kong analyst told Caijing.

Since the first quarter this year, a number of mainland property firms have postponed their plans to list in Hong Kong due to the poor market performance of real estate stocks.

Wen Tianna, general manager of BOCOM International, said that fund mangers have remained pessimistic about real estate stocks in the second half this year. Developers who are planning to list at this moment, when conditions are far from ideal, are mainly compelled by a shortage of capital. Another source from an investment bank said that they have advised developers who are not in urgent need of capital to postpone listing plan until next year.

Longhu is clearly not heading that advice. Established in 1995, they are the largest property developer in southwestern China’s Chongqing City.. The company began expanding rapidly in 2006, accumulating more than 10 million square meters of land reserves in major cities like Beijing, Shanghai, Chongqing, Chengdu and Xian. Sales revenue reached 9 billion yuan in 2007.

But like many developers who expanded aggressively in 2007, Longhu is now suffering a capital shortage, said a source familiar with the company. These woes have been compounded by the May 12 earthquake, which impacted the company’s projects in Sichuan.

Refinancing Hurdle

Along with the difficulties of listing, developers found that refinancing in Hong Kong market has become increasingly difficult this year.

One major factor preventing developers from refinancing in overseas market is the stricter foreign exchange policy. On July 2007, the State Administration of Foreign Exchanges (SAFE) issued a circular to further restrict foreign investments in China’s real estate market.

Under the new regulation, SAFE will not register foreign debt for a foreign-invested real estate enterprise if the company did not obtain approval from the local Bureau of Commerce and filed with the Ministry of Commerce before June 1, 2007. Moreover, SAFE will not process any foreign exchange registration or foreign exchange settlements for capital account items for such companies. 

One industry insider said the new regulations have hindered developers with funds from overseas in their efforts to enter mainland markets.

Compared with Hong Kong, the domestic A-share market has shown signs of more facile refinancing. In late June, Suning Universal Co. Ltd. (SZSE: 000718) won approval from China Securities Regulatory Commission (CSRC) to refinance up to 10 billion yuan, half a year after the company submitted an application. And on July 31, CSRC approved the additional share issuance plan of China Merchants Property Development Co. Ltd. (SZSE: 000024).

While the CSRC, in an effort to regulate the expansion of the real estate industry, tightened refinancing restrictions for developers last October, the pendulum now looks to be swinging the other way. “Regulators have made an attempt to loosen control on developers after real estate market slumped in the first half of the year.” said a source close to the CSRC, noting that the credit policy remains the same. “The CSRC intends to relax refinancing controls on big developers under capital crisis, as an effort to boost the industry,” said the source.

Corporate Bonds

“The regulator encourages developers to alleviate capital pressure by issuing corporate bonds rather than additional shares, since it will have less impact on the market,” said a source close to the CSRC. But regulations on real estate companies’ bond issuance remain strict.

Only a few developers have been approved to issue corporate bonds since this year. On July 7, Poly Real Estate Group Co. (SSE: 600048), China's largest state-owned developer, announced a 4.3 billion yuan bond issuance. Almost at the same time, China Vanke Co. Ltd. (SZSE: 000002), another leading developer in the country, also received approval from CSRC to issue 5.9 billion yuan corporate bonds.

According to Yue Yong, the secretary of Poly’s board of directors, Poly’s bond issuance was guaranteed by Poly Group, a state-owned enterprise with more than 20 billion yuan in net assets, which are qualified by the government requirement on bond issuance guarantee. Yue said about 90 percent of Poly’s bonds will be purchased by insurance companies, with investment companies buying up the remainder. 

In addition to Poly and Vanke, several other developers also were granted the right to issue corporate bonds, including COFCO Property Group Co. Ltd. (SZSE: 000031) and Beijing North Star Co. Ltd. (SSE: 601588). All of these companies, however, are large state-owned enterprises.

Although requirements for bond issuance are strict, the government seems to have no restrictions on developer’s use of the capital they attain. Yue said Poly will use 1.3 billion yuan of the fund raised through the issuance to repay debts, while the other 3 billion yuan will be applied to future investment, adding to the more than 8 billion yuan Poly has already invested in new projects over the first half of this year.

Sell Projects or Cancel Deals

The capital drought has forced many developers to sell a share, or in other cases all, of current projects. On May 26, SOHO China (HKSE: 00410) bought the Kaiyue Center in downtown Beijing at 5.5 billion yuan. A source close to the deal said the original developer of Kaiyue Center had to sell the project due to a capital crisis. According to SOHO president Pan Shiyi, they had been looking for investors since late last year.

On July 4, another developer Agile Property Holdings Ltd. (HKSE: 03383) announced the sale of 30 percent of its project in Hainan Province to the foreign company Crystal I Ltd.

“Most developer will only invite partnership in project development when facing a financing bottleneck,” said a source from an investment bank.

When some developers are selling projects to generate additional capital, others have decided to withdraw from purchase deals.

Suning Group announced August 13 that its subsidiary in Nanjing has cancelled a land transfer deal with the Shanghai government and received a complete refund. The company won the bid on a Shanghai land plot in late 2007 with 4.4 billion yuan. Industry predicted that cost of the project would reach 80,000 yuan per square meter.

Although most developers are unwilling to give up purchased lots while land prices continue to rise, many have been forced to cancel recent land deals. During the first half this year, developers including Fujian Rongxin and Shanghai Zhicheng announced their withdrawal from land purchase deals reached last September.  

An industry insider told Caijing that as the property market flags, an increasing number of developers will choose to quit land purchase deals.

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