Liquid Real Estate, Euromoney magazine, September 2008 – accompanies real estate poll (Morgan Stanley won in China)
Morgan Stanley has consistently proven itself in Chinese real estate in recent years, whether underwriting IPOs, advising on M&A or acquiring in its own right. It’s unsurprising, then, that it’s one of the only names we’re hearing from in today’s grim environment.
An example was the Central China Real Estate IPO which raised HK$1.37 billion (US$176 million) in a Hong Kong listing in May. It remains the only Hong Kong IPO in real estate to price in 2008. Two other real estate floats for Guangzhou-based developers had already been pulled in Hong Kong earlier in the year, for Evergrande Real Estate and Changsheng China Property; Central China’s success in getting away was even welcomed by rivals, delighted to see a sign of confidence in the markets. It went at the bottom of its pricing range, at a hefty 51% discount to 2008 estimated NAV, but the book was well covered and the deal got done. A key achievement in getting the deal away was the appointment of a cornerstone investor, Jiao Shuge, managing director of private investment firm CDH China Fund.
Other deals this year, amid the carnage of the markets, have included a US$153 million block trade for Sino-Ocean, achieved with Citi on April 18 to 40 investors; and one of the few examples of M&A activity in the sector. In July, Morgan Stanley announced it would buy 30% of a property development in Hainan from Agile Property, for US$771 million. Morgan Stanley also advised itself on the deal, making it a rare example of a bank holding any league table credit in Chinese real estate M&A this year.
Agile and Morgan Stanley will jointly develop a project called Hainan Qingshuiwan, with total funding ultimately expected to be over RMB20 billion. The project should develop into a tourism and resort community on a 9.73 million square metre site close to Sanya City. It has the potential to be quite a development: one of the key projects under Hainan Province’s 11th five-year plan, it includes a 12 kilometre stretch of the Qingshuiwan coastline, in a tropical area with year-round warm weather, and is therefore geared to the expected tremendous growth in tourism in China. Plans envisage yacht docks, top hotels, an exhibition centre and an ecological park, among other things. It’s likely to be the first of several examples of cooperation between international enterprises and the Qingshuiwan project.
These recent successes in tough markets follow widespread and significant activity during brighter times. In 2007, for example, it was a joint bookrunner on two key Chinese property IPOs: Country Garden Holdings, which raised US$1.9 billion in April, and Sino-Ocean Land Holdings, which raised US$1.76 billion in September. The bank also joint led the IPO for China Aoyuan Property Group, which raised $537 million in September, and sole led a US$669 million IPO for KWG Property Holding and a $699 million follow-on for Shimao Property Holdings, having joint led its IPO the previous year.
Last year Morgan also advised Shimao when the Government of Singapore Investment Corp (GIC), a sovereign wealth fund, took a 2.8% stake in the developer for US$150 million. And it was an active acquirer in its own right, buying a stake in Modern Way Holdings, a unit of Shimao Property, for RMB1 billion.
Going further back, Morgan Stanley has also bought property portfolios in the Shanghai East Sea Plaza, and another commercial complex in Shanghai, as well as stakes in five projects under development by Szitic Commercial Property Co, a commercial property development and management company headquartered in Shenzhen.
In more favourable markets, it has also been an active debt capital markets bookrunner, launching high yield bonds for both Shimao Property (US$600 million in November 2006) and Agile Property Holdings (US$400 million in September the same year).
The activity in China is hardly surprising given the weight Morgan Stanley attaches to its real estate businesses globally. At March 31, its real estate assets under management stood at $99.6 billion, $30 billion of it in Asia. Since inception its $171 billion of acquisitions have included $46 billion in Asia.
Chinese real estate is a difficult place to be today: most fund managers and analysts advise caution on Chinese developers. That makes for a very bad environment for investment banking services. But it also creates opportunities, particularly in M&A, and it will be interesting to see what slice of the market Morgan Stanley picks up when things begin to steady and grow again.