Hong Kong's heavy discounting

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About Keeping It Real Estate The lowdown from London on trends and happenings in international property investment. SNL's specialist news team joins the dots in Europe and Asia between public and private property, debt and derivatives, REITs and bricks.

If Hong Kong's ongoing flurry of Chinese property company IPOs tells us anything it is that equity investors have no faith in current Chinese real estate values.

Common to all the recent IPOs to date — both successes and failures — are the massive discounts to NAV that companies are offering to entice investors.

It is a world away from conditions just four years ago when the Hong Kong Housing Authority successfully privatized its malls by floating Link REIT in the biggest-ever property trust IPO.  

An article in The New York Times back then quoted David Wong, a professional investor in Hong Kong who planned to borrow more than US$1 million to subscribe to the Link IPO.

"With a 5% discount, I feel safe that at least I won't make a loss," he said at the time.

But these days, the discounts offered by property companies seeking to list on the Hong Kong stock exchange are 10 times greater or more.

Of course, risk has to be priced accordingly: There is a big difference between a well-located and under-rented portfolio of assets in one of the world's Premier League cities and the chancier promise of real estate development on the Chinese mainland.

The contrast in IPO pricing between now and four years ago is nonetheless staggering.

Mingfa Group (International) on Oct. 30 became the latest Chinese property company to lower its IPO sights by slashing its indicative pricing range to between HK$2.00 and HK$2.89 per share from between HK$3.03 and HK$3.79 per share.

Mingfa said the decision to lower its pricing was due to tricky market conditions, after Excellence Real Estate Group Ltd. on Oct. 28 postponed its IPO plans.

According to FinanceAsia, Mingfa's revised terms set a new standard for low-cost property IPOs in Hong Kong since at HK$3.03 the offering was already priced at a 60% discount to estimated 2010 NAV.

In a Nov. 2 article, it said discounts to NAV of about 50% have been the norm in recent weeks, citing the cases of Powerlong Real Estate, Yuzhou Properties and Evergrande Real Estate.

In contrast, Longfor Properties — which has already attracted some heavyweight investors, including Government of Singapore Investment Corp., for between a fifth and a quarter of the entire deal — is holding out for a discount to NAV of between 30% and 39%.

This week should tell if it succeeds. Longfor is due to fix the final price for its IPO on Nov. 11.

Either way, after a sharp run-up in Chinese property prices, investors have every reason to stay a little wary and picky when it comes to Chinese real estate risk.

In an Oct. 13 report, Texas-based consultancy STRATFOR Global Intelligence spells out why Chinese authorities risk a decade of economic malaise if they fail to tame the country's burgeoning real estate bubble.

To some extent, the big IPO discounts currently on offer in Hong Kong reflect that danger.