When a bellwether Chinese property developer reportedly sought buyers for $12bn of assets to repay debt this year, the move sparked hopes of a liquidity boost for the nation’s embattled real estate firms.  
But since January, only about three of 34 assets listed by Shimao Group Holdings Ltd - one of the biggest issuers of dollar bonds in the sector - have been sold, according to exchange filings.
While some of the luxury builder’s prime assets drew interest, buyers have become more cautious about acquisitions in response to the deepening liquidity crisis, according to a person familiar with the discussions. That, along with the broader property slowdown, has led to a price gap that’s often impossible to bridge, this person and another person familiar with the market said. Both declined to be identified discussing private information.
The slow progress underscores a wider trend that signals more bad news for creditors seeking to recover the billions they’re owed. Since an initial flurry of deals in January, cautious buyers and reluctant sellers are struggling to agree to terms, undermining China’s attempt to engineer a soft landing after years of debt-fuelled expansion.
Mergers and acquisitions by listed Chinese developers in the first quarter slumped to the lowest since the pandemic began, data compiled by Bloomberg show. The figures don’t capture transactions smaller than $50mn or those not publicly announced. Meanwhile, defaults have climbed to a record and the slowdown in housing sales continued in April, adding to liquidity woes.
“I haven’t seen any developer successfully lifting itself out of distress through M&A,” Shen Chen, a partner at Shanghai Maoliang Investment Management LLP, who trades high-yield bonds. “Buyers are slashing prices hard. Both sides refuse to budge.”
Chinese regulators see asset sales as a key step to easing the liquidity crisis, and deal financing is one of the few concrete measures of support from Beijing as President Xi Jinping’s government largely steers clear of direct bail-outs.
The People’s Bank of China recently held a meeting with about 20 major banks and asset-management firms seeking looser requirements on a range of financing, including lending for property acquisitions, people familiar with the matter said last month. Regulators in December eased limits on borrowing by major developers used to fund acquisitions.
Deal financing: As part of the push to generate cash for deals, developers and financial institutions plan to raise at least 217bn yuan ($33bn) via acquisition bond sales and credit lines this year, Bloomberg calculations based on public announcements show. Still, the amount to be generated remains small compared with the $90bn in local and offshore notes that developers need to repay or refinance this year, according to Bloomberg data.
So far, it’s unclear how much of the money raised through M&A bonds will be used to buy assets. State-owned China Merchants Shekou Industrial Zone Holdings Co - a relatively stable builder of industrial parks whose yuan bonds trade at par - said it planned to use 43% of its 3bn yuan M&A bond to refinance previous deals. The remainder will be used to pay down debt. Two-thirds of Shenzhen-based Overseas Chinese Town Enterprises Co’s 1.5bn yuan medium-term note was used to replace an earlier loan coming due.
“In the present environment, no property developer feels comfortable about its liquidity, so there is little appetite to use scarce capital to buy assets,” said Paul Lukaszewski, head of corporate debt for Asia Pacific at abrdn Plc in Singapore.
Some prime assets have sold at deep discounts, reducing incentives for developers without immediate payment pressure to sell. Holding out for a market rebound might be more favourable.
In January, Sunac China Holdings Ltd sold its stake in a project in central Wuhan covering an area equivalent to 19 football fields to a unit of state-owned Beijing Capital Land Ltd. at a 59% discount, according to people familiar with the matter. In late April, Guangzhou R&F Properties Co agreed to sell its stake in a property project by the River Thames in London at a HK$1.84bn ($234mn) loss.
Shimao, known for its portfolio of five-star hotels in prime locations, in January sold Hyatt on the Bund in the centre of Shanghai for about 20% less than the appraised value, a person familiar said.
The previous month, Shimao recognised a loss of HK$770mn from offloading a stake in a Hong Kong residential project to repay debt.
Sunac and Shimao didn’t immediately respond to requests for comment.
Quick cash: Developers may sell at a discount or even take a loss to get quick cash but this may force them to part with quality projects, according to Tan Shengying, fixed-income analyst at HFT Investment Management.
“Selling assets could be considered costing the developer’s liquidity in the future,” Tan said.
More recently, buyers are prioritising their own financial security by limiting deals to individual property projects, such as joint ventures in which they already hold a stake.
China Overseas Land & Investment Ltd, the second-largest state-owned builder by sales, acquired stakes in a Guangzhou project from Agile Group Holdings Ltd and Shimao.
“It would be great news if state-owned firms stabilise private property companies by buying 20-30% of their shareholdings,” said Dhiraj Bajaj, head of Asia credit at Lombard Odier, a top 10 investor in China’s junk property bonds. “Unfortunately, we are not seeing that trend. Frankly, it is too late for most privately owned developers now.”
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