Expect M&A as big China developers hit wall

By Dominic Whiting, Asia property correspondent

HONG KONG (Reuters) - Squeezed by a clampdown on bank lending, several big Chinese property firms could fall prey to takeovers by rivals or funds if they fail to push through IPOs this year, according to one of Citigroup's top bankers in Asia.

As many as 40 unlisted Chinese developers have taken on structured investments, including convertible bonds, with investors counting on Hong Kong initial public offerings for their exit strategies.

But if the companies fail to list soon, they will have to refinance at a time when convertible bond investors are expecting 15-20 percent internal rates of return to compensate for higher risk, compared with 12 to 15 percent a year ago.

Edmund Ho, Citigroup's head of Asia property investment banking, said some firms may need to sell themselves to better capitalized listed developers or to private equity funds from the second half of this year.

"Those companies are under pressure because the cost of capital is high," Ho told Reuters in an interview.

"The take-out has always been an IPO, so they have to refinance if an IPO doesn't happen."

Volatile stock markets have derailed several IPOs globally in the last couple of months, including in Hong Kong.

Developer Changsheng China has postponed a $145 million listing and bankers say rival Hengda Real Estate is still waiting for the right moment to launch an IPO worth up to $2 billion after receiving regulatory approval in January.