SOHO China eyes land purchases, Shanghai

BEIJING (Reuters) - Commercial property developer SOHO China Ltd (0410.HK) has built up a war chest of $1.9 billion to replenish its land bank and start new projects in Shanghai and Beijing in the second half of the year, its chairman said.

It will be the first time that SOHO China has ventured beyond the capital, where its modern, eye-catching developments are dotted around the city center.

"We have entered some in-depth talks (in Shanghai)," Chairman Pan Shiyi told the Reuters Global Real Estate Summit on Monday. "They are mainly about acquiring land and half-built or completed buildings from others."

Despite the strong temptation to branch into other Chinese cities, Pan said SOHO China would stick for now to Beijing and Shanghai, which together account for 30 percent to 40 percent of China's retail and office market.

SOHO China is expanding to take advantage of property valuations that have fallen to attractive levels after a deep downturn since late 2007. The market has begun to show some signs of picking up in recent months.

But Pan said the recovery, in the property sector as well as in the overall economy, was mainly driven by too much liquidity, and he warned that a record pace of bank lending so far this year could fuel inflation.

"Inflation has been built into our economy like a virus," Pan said. "It's still in a latent phase for now, but it will certainly break out when the economy recovers."

He said another asset bubble was also forming, demonstrated by rising land transactions and higher prices.

In Beijing, 23 lots of land were sold in May, fetching a total of 6.2 billion yuan, almost five times more than in April. Guangzhou R&F Properties (2777.HK) paid 1.02 billion yuan last month for a lot with gross floor space of 72,500 square metres in southeastern Beijing.

Morgan Stanley last week upgraded SOHO China to overweight, while maintaining its price target at HK$6.10. "Our previous concerns over the company's long-term growth prospects and its lack of geographic diversification have been assuaged as we see the company's expansion plan gradually emerge," Morgan said.

Shares of SOHO China rose 1.52 percent to HK$4.68 during Monday's morning session.

EYE FOR A BARGAIN

SOHO China would look at participating in public land auctions, but Pan said it would be quicker and cheaper to acquire distressed property assets, particularly in Shanghai.

Doing so would enable SOHO China to increase its leverage.

Banks are barred from lending money to buy land at auction from the government. But a rule introduced last December allows them to finance half the cost of land acquired from other developers.

SOHO China has 10.7 billion yuan ($1.57 billion) in cash and will soon raise HK$2.8 billion ($361 million) in a convertible bond issue. In March and June, it secured two 10 billion yuan lines of credit from China Merchants Bank and Bank of China for land acquisition and other purposes.

Earlier this month, China cut the equity capital requirement ratio for property projects to 20 percent from 35 percent to increase developers' leverage and boost private investment.

"It shows the government's determination to stimulate the economy," Pan said. "It's effective."

Real estate investment grew 6.8 percent in the first five months from a year earlier, compared with an annual rise of just 1 percent in the first two months.

However, Pan warned against premature optimism about the economy, pointing to weak power production and export data.

"Where have the new loans gone? Are people investing in new factories?" he asked. "No, they are either buying properties or stocks."

HOLDING ONTO PROPERTIES

Pan said SOHO China had decided to hold onto some of the projects it develops, instead of selling them upon completion, to smooth its earnings.

The staging of the Olympic Games last August meant SOHO China had to delay the handover of some buildings it had completed and pre-sold.

As a result, it was unable to include 4.3 billion yuan in revenues, and 1 billion yuan in profits, in its 2008 accounts. That led to an 80 percent fall in net profit to 399 million yuan.

"If we hold onto more properties, our earnings will be more stable as we will have rental income every month," he said.

The first property SOHO China will retain is a retail development in Qianmen, south of Tiananmen Square, which was officially launched onto the market last week. It will keep two city-center projects that are still under construction, Pan said.

($1=6.836 Yuan)

(For summit blog: blogs.reuters.com/summits/) (Additional reporting by Xiaoyi Shao; Editing by Muralikumar Anantharaman)