In an economic downturn companies make the most of the small victories. That’s why as property stocks rose in Hong Kong in June, Soho China (410.HK) took advantage of the rally to issue US$360 million in convertible bonds (CBs). Other property developers also turned to the capital markets, with the likes of Hopson (0754.HK) and Shui On Land (272.HK) making new share issues.
"It’s not surprising for a company to do either a share placement or a CB issue at this time," said Carol Wu an analyst with DBS Vickers in Hong Kong, who has a buy rating on the stock.
Soho will use the funds raised from the five-year CBs to purchase land in Beijing and Shanghai. It isn’t the only firm keen to expand its land bank. Shimao (813.HK) paid US$441.9 million for 137,000 square meters of land in Xiamen, while China Vanke (000002.SZ) spent US$292.6 million on land in the second-tier cities of Wuxi and Foshan. China Resources Land (1109.HK) has also been making acquisitions.
Although the statistics suggest now might be the right time to buy – between January and May, real estate sales increased 62% in Shanghai and over 50% in Beijing – Wu remains cautious. She says most of the increase can be put down to the release of pent up demand from buyers who have been reinvigorated by favorable government policies such relaxed mortgage regulations. The big question is whether this rally is sustainable. The answer may hinge on developers maintaining conservative pricing strategies.
It would be wrong, however, to bracket Soho with the residential-heavy developers that are riding high on the back of relaxed policies. Analysts say Soho’s current business model of focusing on retail and office space with only a slight investment in residential gives it an edge.
"Soho doesn’t have that many competitors going after prime sites for retail and office," said David Ng, head of regional property research for the Royal Bank of Scotland.
Nevertheless, the success of Soho’s CB issue largely rests on the fortunes of the property market as a whole, and whether sales can remain sufficiently buoyant to keep share prices up. If the option on a Soho CB is not "in the money" then the company could face a repayment risk, said Kaven Tsang, an analyst in the corporate finance group for Moody’s.
Other developers have already encountered this dilemma. Tsang cites Greentown China (3900.HK), which spent most of its cash flow buying back one tranche of bonds and is now struggling to pay out on the next tranche due in May 2010, as a particular concern.
"Greentown will have to build up cash or look for refinancing," said Tsang.
Hopson is now in a better position. The firm’s US$204 million share sale means it has capital on hand to cover a CB due in February 2010.
While a potential deterioration in the residential market can’t be ruled out and the office space sector is sluggish due to overcapacity, Soho can assess these risks in the knowledge that its retail developments are performing well. It can also rely on the quality of some of its assets.
"There are still investors interested in buying property in the center of Beijing because if they get a yield of around 4% to 5% it’s still better than putting the money in the bank," Wu said.