property-is-flavour-of-the-month-in-hong-kongs-ipo-market

Property is flavour of the month in Hong KongÆs IPO market

Four Chinese real estate companies start pre-marketing, undeterred by the struggles faced by three recent property IPOs.

A wave of initial public offerings from Chinese property firms is set to hit Hong Kong over the coming weeks. With at least four Chinese property developers currently at the pre-marketing stage, one might think that the three most recent listings in the sector had sailed through. In reality, though, the IPOs for China South City Holdings, Glorious Property Holdings, and Powerlong Real Estate Holdings were all plagued either by a lack of investor demand or by poor secondary market performance.

One of the main issues facing the next lot of developers is differentiation; not only will it be necessary for them to show that they are distinct from their sector peers trying to list, they will need to persuade investors that they offer something different to the numerous Chinese developers that are already listed in Hong Kong.

Price and valuation will distinguish the IPO candidates from the companies that are already listed, said sources. But when choosing which of the upcoming IPOs to buy, investors will be looking at the different property portfolios that each company owns and the geographical areas it focuses on. Other important factors will be growth prospects and the size of the landbank.

The developer that is expected to launch the largest IPO is Evergrande Real Estate Group, which yesterday started pre-marketing for a transaction that is expected to be around $1 billion. Evergrande started out developing properties in the southern city of Guangzhou in 1996. It now has 43 projects in 23 cities across China. It has a larger landbank -- 51.2 million square metres -- than any of its listed peers.

As a residential real estate developer with properties all over China, Evergrande has built its business through standardisation, both in terms of its operations and its product. The advantage of this is that it is able to maintain the quality of the housing on a national level, while at the same time keeping costs down.

Another company currently telling investors its story is Excellence Real Estate Group, a Shenzhen-based company that builds high-end commercial and residential properties. Excellence is looking to raise between $700 million and $1 billion, making it the second-largest offering after Evergrande. With a focus on grade-A offices and luxury apartments, the company's differentiating feature is that it offers a broad exposure to the top-tier property market in Shenzhen. It is also said to have the strongest brand in the city.

The two other companies looking to list have a Fujian focus. Mingfa Group (International) is currently pre-marketing a deal that is expected to raise between $400 million and $500 million. It builds both commercial and residential properties, and has around 29 projects in Fujian and Jiangsu.

Mingfa is joined by Yuzhou Properties, which is Xiamen's largest residential developer in terms of market share. As well as a 10% share of the city's residential market, it also has a small sideline of commercial properties. It is currently at the investor education stage for an IPO that should raise between $250 million and $300 million.

The backdrop to all of these property IPOs is a strong housing market. "We have observed that the residential sales market has performed remarkably well around the country since about March," said Steven McCord, senior manager of research at Jones Lang LaSalle in Shanghai. This, he said, is due to two reasons: housing has become more affordable as a result of lower down-payment requirements and taxes; and buyer confidence has improved following the rollout of the government's stimulus package.

The underlying property market may be healthy, but that doesn't mean property IPOs are a done deal. So far this year, there have been three property IPOs, all launched in September. As of yesterday's close, China South City was trading 33.8% below its IPO price, while Glorious Property had fallen 22.5% from its issue price. Powerlong is due to start trading on Wednesday after pricing its IPO below the original price range -- something which is highly unusual in Hong Kong.

This many IPOs, in the same sector and at the same time, is providing plenty of business for a whole host of banks. The Evergrande deal is led by Bank of America Merrill Lynch, BOC International, Credit Suisse and Goldman Sachs. The roadshow will start next Monday (October 19) and run until October 28. Trading is expected to start on November 5.

The timetables for the other deals have not yet been decided. Investor education is expected to continue for the rest of the week, with formal marketing likely to be launched sometime next week.

The Mingfa deal is arranged by Bank of America Merrill Lynch and Deutsche. Excellence is being brought to market by Morgan Stanley and UBS, while the Yuzhou IPO is led by Morgan Stanley as the sole bookrunner.

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