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CDL latest to seize new opportunities in China

5.5b yuan buy into Sincere Property Group is group's single biggest investment there; ongoing trade war and China's credit crunch offering firms chance to boost presence

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Sincere's mega project Zhengzhou Financial Island comprises offices, serviced apartments, hotels, a retail mall and cultural centres.

Singapore

THE ongoing trade spat and China's credit crunch may have created opportunities for Singapore developers, with City Developments Limited (CDL) becoming the latest to seal a major property deal in China.

The property giant is taking up a 24 per cent stake in Chinese developer Sincere Property Group for 5.5 billion yuan (S$1.1 billion), marking the group's single biggest investment in China so far.

CDL group chief executive Sherman Kwek said: "This transforms our company especially in China where it was very painful for us the last seven to eight years to buy one project at a time... Now we can seriously bulk up on scale and grow with our partner with the necessary expertise on the ground."

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Since entering China in 2010, it has built a presence in just three cities, but with this deal, it will go to 20 cities. CDL's portfolio allocation in China will rise from 9 per cent (as at Dec 31, 2018) to 15 per cent after acquisition. CDL's announcement comes months after CapitaLand had entered a joint venture earlier this year to acquire Pufa Tower in Shanghai for 2.75 billion yuan (S$546.3 million).

Late last year, CapitaLand also teamed up with GIC to acquire Shanghai's tallest twin towers for 12.8 billion yuan (S$2.54 billion).

RHB's Vijay Natarajan told The Business Times that the credit crunch in China may have given players with deep pockets and low gearing a chance to buy at better valuations. He said: "Mostly Singapore developers have been in China for a while and know the market reasonably well. They may be seeing this as an opportunity because of the trade tensions and financing conditions."

OCBC Investment Research's Andy Wong believes that Singapore developers are angling for a long-term play. "My take is that the developers are there for the long haul and China is a market that's difficult to ignore given traits like rising affluence and increasing urbanisation. I think they are willing to accept the volatility in the short term."

CDL's Mr Kwek said as much when he told a media briefing that while there may be ups and downs in China, "if you have holding power, it always ends up being OK".

While he hopes the China and US trade war will not be prolonged, it has in the short term "created opportunities for developers like us to enter the market and to partner with Sincere".

He added: "As we go forward for the Chinese real estate market in the next five to 10 years, you will see more consolidation... the big are getting bigger."

Sincere's pipeline of 70 development projects - which includes mega development Zhengzhou Financial Island - with a total landbank of 12.6 million square metres.

Over 90 per cent of Sincere's landbank is located in Tier 1 and 2 cities. It will also buy from Sincere a 70 per cent stake in a prime commercial asset, Phase 2 of the Shanghai Hongqiao Sincere Centre, for 1.2 billion yuan (S$247 million), or about 49,000 yuan per square metre.

Sincere has expertise in asset classes such as retail malls, residential, serviced apartments and business parks. "We want to grow our commercial portfolio in a larger way so our earnings have a stronger foundation, that is also what attracted us to the deal," Mr Kwek said. He also said there is potential for fund management opportunities ahead, either through Reits or private equity funds.

Wu Xu, Sincere's founder and chairman, said: "CDL's investment and support will be instrumental in accelerating Sincere's growth as we continue to increase our landbank and pipeline of properties with the aim of achieving even stronger sales growth."

In 2018, it booked 21.3 billion yuan in contracted sales, which will be booked as revenue for Sincere from 2019 to 2021 upon property handover. Mr Kwek said: "Part of the sales are locked in, and obviously we have to keep churning and replenishing land bank to sell."

The end goal is an initial public offering in a few years.

CDL's investment comprises share subscriptions and loans. Mr Kwek said he could not disclose the proportion due to conditions precedent for the deal. Some of CDL's funds will go towards retiring Sincere's debt - it has a net gearing of 200 per cent.

The company went on a landbanking spree in 2017, Mr Kwek said, and now Sincere is also looking into potentially paring down commercial assets, particularly the ones that are stabilised. CDL does not want Sincere's net gearing to cross 250 per cent.

After the deal, CDL will be the second largest shareholder after Sincere's founder and chairman Wu Xu, while state-owned property giant Greenland Holdings' stake will go down to less than 20 per cent from 40 per cent subject to further discussions with the group. Greenland's stake has mostly been passive, Mr Kwek said.

For CDL's investment in Sincere, HSBC acted as the financial adviser and Fangda Partners as the legal adviser. The deal is subject to approval by authorities, and expected to be completed by Q4, while the Shanghai purchase is expected to be wrapped up by Q3.

READ MORE: CDL doubles Q1 profit to S$199.6m; CEO joins board