China Overseas Land & Investment is buying the residential real estate business of conglomerate CITIC for 31 billion yuan ($4.8 billion) as the state-owned property developer moves to secure land amid their rising prices.
China Overseas Land is paying for the deal by issuing HK$29.7 billion ($3.8 billion) worth of new shares while the remainder would be paid by transferring 6.15 billion yuan worth of property portfolios to CITIC, the developer said in a securities filing to the Hong Kong stock exchange on Monday.
The deal, which is subject to shareholder and regulatory approval, will free up CITIC to focus on commercial property, the conglomerate said. After its completion, CITIC will become China Overseas Land’s second-largest shareholder with about a 10 percent stake.
Chinese real estate developers are acquiring more land outside of auctions by purchasing from other companies and through redevelopment as escalating land costs crimp profit margins.
Standard & Poor’s warned last week that competition for land in top-tier cities could intensify, eroding developers’ profit margins.
“If it proceeds, the deal would allow COLI (China Overseas Land) to replenish its land bank apart from public auctions where land prices are rising sharply – hence addressing investors’ concern about COLI’s growth outlook,” Morgan Stanley wrote in a research note.
CITIC Chairman Chang Zhenming said in a statement the deal will enable the company to focus on commercial real estate, particularly large integrated projects. CITIC said it expected to record an HK$9-11 billion gain from the disposal.
As part of the deal, China Overseas Land is issuing 1.095 billion new shares at HK$27.13 apiece, representing a 5.36 percent premium over the stock’s previous closing price.
Senior Chinese officials raised alarm over the country’s overheated housing market during an annual parliament meeting in Beijing last week, throwing the spotlight on a potential bubble forming in parts of the property market.
China Vanke Co , the country’s largest property developer, said in its earnings conference that high prices have spread to outskirts of first-tier cities.
Rattled by a rapid rise in home prices in cities such as Shenzhen and Shanghai, land minister Jiang Daming said China will announce measures to boost land supply.
Shares of CITIC were down 2.6 percent on Monday, while shares of China Overseas Land were up 1.8 percent. The benchmark Hang Seng Index was up 1.2 percent.