With China’s tightening housing policies, property developers are looking to invest in places where the growth potential is higher. Guangzhou R&F Properties (02777.HK) is the latest developer to go overseas for business, following in the footsteps of rivals like Country Garden (02007.HK) and China Vanke (000002.CN).
Initial reactions to R&F’s maiden investment in Malaysia have been mixed.
J.P. Morgan said in a report that the group’s latest move caught it by surprise as management had not mentioned such plans before. It may make investors wonder if management made a thorough study of the market before making such a decision, the bank said.
Standard & Poor’s gave a slightly more upbeat review, saying the group’s long experience in large-scale projects and robust property sales in China could temper the risk.
But why has R&F picked Malaysia? The property developer said in a statement the Malaysian property market has significant growth potential that comes from strong economic fundamentals and demographic factors.
It acquired six parcels of land in Malaysia for 4.5 billion ringgit (US$1.39 billion). It plans to develop high-rise apartments, low-density housing, offices, a hotel and a shopping mall with an estimated saleable floor area of 3.5 million square meters. The sites are located in Johor Bahru of Western Malaysia, which is populated by a sizable Chinese community.
In fact, rival Country Garden has achieved huge success in the Southeast Asian country in recent years, according to financial news website Yicai.com. The group has invested in three projects since 2011. Its Danga Bay project, which is also located in Johor Bahru, opened for sale in August. The group has sold more than 6,000 houses and apartments with sales reaching 9.3 billion yuan (US$1.5 billion), which is about 30 percent of R&F’s total sales last year.
No wonder R&F Properties would want to have a share of the market.
Its performance has been lackluster in the past few years. Even when China’s housing market was booming, its annual sales deflated by 6 percent from 2010 to 30.3 billion yuan last year.
To make matters worse, its gearing ratio has shot up to over 100 percent in the first six months of this year, from 86 percent in 2012, which could pose a serious risk to the group. By comparison, Country Garden’s ratio during the same period was 60.1 percent.
Shares of R&F have dipped over 6 percent this year, while Country Garden has jumped 24 percent.
Overseas projects generally have a higher liquidity requirement for a developer. Some countries won’t let developers pull their funds before projects are completed, Yicai.com quoted analyst Zhu Yiming of research institute CRIC as saying.
As such, the ability to maintain liquidity will be one of the biggest challenges for R&F.
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