China property: opportunism knocks

Sometimes it is better to sell when one is able, rather than when one wishes. After insurer China Taiping had a $1.7bn rights issue last week, and diversified financial Fosun raked in another $1.2bn on Monday, blue-chip developer China Resources Land on Tuesday became the latest big Chinese company to tap the market. It aims to raise up to $1.3bn in new equity.

CRL does not appear to need the cash. Its net debt to equity is shy of 50 per cent. Of the major Hong Kong-listed China residential property developers, only China Overseas Land and Investment's balance sheet is stronger. Many peers are weaker: Barclays forecasts Evergrande's net debt to equity will hit more than 300 per cent this year as it diversifies away from real estate.

CRL may not appear in immediate need, but its stock has rallied hard, and demands for cash lie ahead. By the end of 2016 it must find $6bn to pay for its most recent big asset purchase and repay debt, DBS Vickers points out.

As secular growth in China's property market slows, cyclical factors come into play. Consolidation becomes a more important source of growth, especially during weak periods. It is already happening. In 2014, the share of Chinese sales volumes accounted for by 27 major developers was 26 per cent, up 5.5 percentage points from 2013, according to Deutsche Bank. New capital will allow these companies to keep taking share until the next upswing arrives.

This could be sooner than expected. April sales figures reported so far give a hint that inventories are being cleared out, with price cuts stimulating strong volume growth. The price declines have been slowing, but Beijing is on the case. The recent interest rate cuts are equivalent to a price cut of nearly 6 per cent, Barclays estimates.

China's stock market remains extremely accommodating, so the capital calls can continue, or even accelerate. For the consolidators, this is an opportunity indeed.

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