Property management firms that were once highly valued are seeing a decline in their share prices as a result of China’s real estate crisis, which is making investors wary.
As a result of investors’ reactions to the most recent examples of these corporations providing financial support to financially desperate developer parents, already bruised share prices have plunged another 7% this month.
According to John Lam, head of China & Hong Kong estate research at UBS, the capital industry has lost faith in some property management firms, even ones that haven’t witnessed their parents squander money.
In one of the most recent instances that has alarmed investors, China Evergrande Group (3333.HK) revealed on July 22 that an internal investigation had revealed that $2 billion in funds held by subsidiary company Evergrande Property Services (6666.HK) had made a pledge to safeguard financing by the group for debt reimbursement.
In the end, banks took the cash and cleaned out a large portion of the unit’s money. The world’s most indebted real estate developer, China Evergrande Group, has been at the central core of China’s real estate crisis, in which numerous similar businesses have defaulted as a direct consequence of government initiatives to deleverage the industry.
Then, on August 1, shares of property operator Jinke Smart Services Group (9666.HK) fell 37% after it announced it would lend parent company Jinke Property (000656.SZ) up to $222.3 million.
Some property management companies issued & sold shares to raise money that was given back to parents as the situation grew last year.
Additionally, property management Shimao Services Holdings (0873.HK) paid an astronomically expensive sum to acquire a company from developer Shimao Group (0813.HK), the parent company.
Investors have not been satisfied by such actions. According to Lam, since mid-2021, assessments for managerial subsidiaries of troubled developers have plummeted from a high of 25 times profits to roughly five to six times, with the possibility of more pressure on those still beyond this level.
Falls carry on. The Hang Seng sub-index that monitors the biggest Chinese property management companies (.HSPSM) has been down 7% since Jinke Smart Services’ statement, while the larger Hang Seng Index (.HSI) is underwater by less than 1%.
The chief distribution officer, William Shek of hedge fund manager Zeal Asset Management Ltd., based in Hong Kong, claimed that since the start of the property crisis, his company has been cautious in this area.
Shek unveiled that it is unlikely that subsidiaries will be protected from hazards if their parent company has difficulties.
The consistency of property managers’ earnings is another issue. Veteran executives of two developers acknowledged that income was constrained by how much parents would ever pay because a significant portion of their company was offering management services to parents.
Analysts saw a spike in impairment adjustments for receivables by property management companies in the second period of last year. Statistics for the first part of 2022, when many developers were falling out of cash, are predicted to worsen the trend.
Analysts are less worried about apartments built by state-owned developers since they have strong liquidity positions and must adhere to tight governance standards.
But late last month, GMT Research focused on the state-owned Beijing Resources Mixc Lifestyle Services (1209.HK), estimating that at least 55% of the company’s income originated from connected parties, notably parent China Resource Land (1109.HK).
Despite trading at 31 times projected earnings for 2022, according to GMT, the property services unit, China Resources Land may have minimal motive to improve its profitability.
In an email statement, China Resources Mixc Lifestyle Services stated that their service costs were open and fair. It noted that among other things, its market development potential drove its market-leading valuation.