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Singapore developers stay sanguine about top China cities

Despite China's clampdown, Tier-1 and 2 cities still major contributor to sales and profits
Monday, April 18, 2016 - 05:50

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Notwithstanding their optimism, S'pore property firms are keeping close tabs on market conditions in China. CDL deputy CEO Sherman Kwek (left) said the group is keen to buy a China developer; CapitaLand China CEO Lucas Loh sees continued steady performance in China sales this year.

Singapore

WHILE skyrocketing property prices in top Chinese cities have prompted China to rein in the rage, Singapore developers with substantial exposure to these cities remain unfazed.

Many are still bullish about their prospects in China and are looking to raise their exposure further. Yet, they are keeping close tabs on market conditions when it comes to timing residential launches.

CapitaLand China CEO Lucas Loh said the group has a launch-ready pipeline of over 7,300 units in China this year, which will be released for sale depending on market conditions and subject to regulatory approval.

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"We expect residential sales in China to continue to perform steadily this year," he said. "In general, we are witnessing stronger housing prices and healthier transaction volumes in first-tier cities, particularly Beijing, Shanghai and Shenzhen. This bodes well for CapitaLand as first-tier and second-tier cities make up about 93 per cent of our China property value."

City Developments Limited (CDL) deputy CEO Sherman Kwek told BT that in the first three months of this year, the group has already sold over 250 residential units for a total of 640 million yuan (S$134 million) in its Suzhou project Hong Leong City Center, which sold over 500 units last year with sales value of one billion yuan.

The group is on the look-out for opportunities to "acquire projects on a portfolio basis" from Chinese developers that are under cash flow pressure. The group is also keen to buy a Chinese developer with strong land bank. The target could be a private or listed company, he said, adding that some listed developers still look attractive given the huge discounts to net asset value they are trading at.

Prices of new homes in China's most developed cities have surged over the past 12 months, with Shenzhen leading the pack with an over-50 per cent jump and Shanghai property prices surging some 20 per cent. Small cities, on the other hand, are plagued by a major overhang of excess apartments - with the majority registering year-on-year declines.

This two-speed property market has prompted diverging policy responses from local authorities and the central bank with a mix of tightening policies in Tier-1 and larger Tier-2 cities co-existing with nationwide loosening measures.

Shenzhen and Shanghai governments have implemented several measures this year, including tightening approval criteria for non-resident homebuyers, higher minimum downpayment requirement for second-home mortgages, and banning unregulated lending. The tightening campaign also spread to second-tier cities Nanjing and Suzhou.

Shanghai's lending curbs were seen as most severe - with the downpayment requirement to qualify for a second-home mortgage raised to 50-70 per cent from 40 per cent previously. There are signs that the onset of tighter lending rules in Shanghai and Shenzhen since late March is already having an impact on sales, according to various local surveys.

Though residential sales could moderate in the top Chinese cities this year, analysts note that the impact may not translate into earnings for Singapore developers this year since these sales will be recognised upon project completion.

DBS vice-president for group equity research Derek Tan said that Singapore players fared better than their Chinese peers last year, due to their targeted focus in first and second-tier cities where residential sales enjoyed a fillip from favourable measures since 2014.

Religare Capital Markets head of Asean real estate research, Tata Goeyardi, also attributed the sterling performance of Singapore developers' China portfolios last year to the strong locational attributes of their projects.

CapitaLand, with a 20-year long history in China, achieved record sales of 9,402 residential units there last year, representing 77 per cent of the units launched and almost double the 4,961 units sold in 2014; higher sales were achieved across all regions in China. The sales value achieved in China last year was 15.4 billion yuan, more than double the 7.6 billion yuan in 2014.

Keppel Land, part of Keppel Corporation, sold 3,280 homes in China last year, up from some 1,900 units in 2014. Higher revenue from residential projects in China helped to offset lower revenue in Singapore last year. It still has 38,976 units (spanning 5.57 million sq m) for sale in China of which 4,114 units are launch-ready this year, mainly in Shanghai, Wuxi, Chengdu and Tianjin.

For Frasers Centrepoint Ltd (FCL), China makes up 5.8 per cent of its revenue and 7.5 per cent of its profit before interest, fair value change, taxation and exceptional items in its fiscal first quarter ended Dec 31, 2015. Over 800 units across its China projects are planned for release over the rest of the fiscal year.

"Overall, the market environment remains challenging for now, and our stance on China is slightly cautious at the moment," said Christopher Tang, CEO for commercial and Greater China at FCL. "Our immediate priority in China is to sell our remaining launched inventory and develop our landbank in the country, which amounts to around 800 units and 3,100 units, respectively."

Mr Tang added that FCL remains optimistic about China's medium to long-term prospects, which are underpinned by a growing middle-income population and rapid urbanisation. "We continue to look for opportunities to grow FCL's business in China, with an initial focus on the three cities we are already in - Suzhou, Shanghai, and Chengdu. We plan to use these cities as bases from which we can look at opportunities for expanding into neighbouring cities."

Developers reckoned that given the significance of the real estate sector to the Chinese economy, the central government will likely refrain from draconian measures.

Mr Kwek noted that CDL's strategic decision to go with Tier-1 and 2 cities has proven to be right amid a massive oversupply in the smaller cities due to a flurry of land sales by the local governments to prop up revenue for public projects.

CDL will continue to remain focused on the Yangtze River Delta region - Shanghai, Suzhou, Nanjing, Wuxi and Hangzhou, as well as the south-western region anchored by Chengdu and Chongqing. It may also consider opportunities in Wuhan and Xi'an in central China.

But Mr Kwek flagged another prominent trend in China that could be of concern. More Chinese are looking to park their money overseas in markets like the US, the UK, Japan, Canada, Australia as well as Singapore, which has affected developers in China to some extent.

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