Funds stalk capital-starved Chinese developers

By Dominic Whiting, Asia property correspondent

HONG KONG (Reuters) - Starved by banks and shut out of the stock market by dismal IPO conditions, Chinese developers are going cap-in-hand to investors to keep their lucrative housing projects alive.

Private equity and hedge funds are excited by the prospect of cheap investment in companies still notching up yearly earnings growth of 40-50 percent but getting desperate for finance.

For example, Robert Appleby, chief investment officer at ADM Capital, is looking to buy debt at deep discounts.

"There is more trouble to come and I wouldn't be diving into Chinese property companies even at these levels," Appleby told the Reuters Hedge Funds and Private Equity Summit this week.

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.

Volatile stock markets have derailed several IPOs globally this year, including in Hong Kong.

Evergrande Real Estate Group Ltd ditched a planned $2.1 billion initial public offering and is now exploring a $400 million to $500 million private placement.

Rival developer Changsheng China postponed in January a $145 million listing, and other delayed deals include a planned $1 billion IPO by Longhu Real Estate and a similar size listing by Star River Group.

Last year, Chinese property companies raised $7.6 billion in Hong Kong listings, seven times the 2006 total, according to Thomson Financial.

Investors taking stakes in developers or their projects can now expect internal rates of return of around 35 percent, compared to around 25 percent a year ago, said Mark Chu, head of Asia property investment banking at Merrill Lynch.

"With a difficult IPO market in the short term you'll see private equity and hedge funds going in," Chu said. "The capital is available, and it's up to the developer to decide whether to take it. With land premiums to pay, most are."

Merrill Lynch ML.N Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz) and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) were hired for Evergrande's IPO and are running the firm's share placement, a source has told Reuters.

NUCLEAR WINTER

Beijing's efforts to cool the housing market have clouded IPO prospects by contributing to a slide in Chinese property stocks listed in Hong Kong, by as much as 50 percent in three months from late October.  Continued...