Interview: Emperor Group’s debt to soar on property purchases

The Hong Kong group’s property arm’s rapidly appreciating real estate prices has boosted its creditworthiness and made it easier to borrow money, says Vanessa Fan, group managing director.

  • 15 May 2012
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Emperor International Holdings, the property arm of Emperor Group, is aiming to increase its borrowing on the back of resilient real estate prices, which continue to reassure bankers of its creditworthiness.

The average gearing ratio for the company ranges from 30% to 40% but can go up to 50%, which is still relatively low given the fact that the real estate business is capital-intensive.

When it comes down to the construction of a property, Emperor International is committed to borrowing 100%, whereas for land acquisitions it only borrows up to 40% of the land value.

“We keep a very healthy level of gearing,” declared Fan in an interview with Asiamoney PLUS on May 11. “Banks are not worried because the property market is very mature and they are protected because our gearing ratio after all is not that high. With new projects, we can always go to the bank to get normal bank financing.”

“The banks in Hong Kong are very active with supporting property projects, particularly our kind of development projects which are high-value residential units,” she added.

It takes approximately three to four years to complete a housing development project. And as soon as Emperor International can secure deposits from the pre-sale of its property units, it begins to pay back its debt.

“The tenor of the loan will depend on your project completion and selloff dates. That is when you have to pay it off completely,” said Fan.

This so far has not been an issue for the developer. As at November 2011, Emperor International managed to sell up to 84% of the total available units at one of its premium property developments named 18 Upper East, located in Sai Wan Ho. It began pre-selling in April 2011 and is due to complete in the third quarter of this year.

Another property development called The Java, located in North Point, managed to secure 95% in unit sales since its pre-sale in July 2010. The complex was completed in the first quarter.

The fact that the land value of these properties have doubled since acquisition reassures bankers of the company’s creditworthiness. For example, 18 Upper East’s cost per square feet when purchased a few years ago is approximately HKD5,500 (US$708). It is now worth HKD11,200 per square feet.

As long as the Hong Kong real estate remains buoyant, the developer—whose property pipeline is usually filled six years in advance—will continue to have easy access to financing.

“Our property is growing rapidly due to value creation. We grow in value and we go to the bank to tap on that value growth to get the extra cash that we need for further acquisitions,” said Fan. “It’s like a continuous snowballing effect.

“In fact, the cycle is so quick, that we get the cash back in a few years and of course we don’t sit on the cash. We buy land reserves to fill up our timetable further down the road. Those are projects as good as cash,” she added.

She declined to state how much the company plans to borrow over the next few years, stating that it is difficult to gauge.

The total external borrowings excluding payables of the group amounted to approximately HKD8.8 billion (US$1.13 billion) during the first six months ending 30 September, 2011 and maintained a debt to total asset ratio of 31.3%. During the same period, assets with carrying value of HKD18.3 billion were pledged as security for banking facilities.

Leveraging on China’s wealth

Emperor International is also prominent in the mainland where its primary focus is on retail and commercial developments.

But the company is not exposed to the ongoing credit challenges that are prevalent in the Chinese real estate market as it does not tap onshore funding and the difficulties that market are experiencing are largely restricted to the residential side of the industry.

“The stringent access to credit is only imposed on housing developers as the prices are too high and ordinary citizens cannot afford a home,” said Fan. “Our focus is on shopping malls and office towers. These are the areas that the government has the least concern.”

Nonetheless, the Emperor International believes that it will be a win-win situation for all. The Chinese local governments will be able to benefit from more foreign direct investment and the company will be able to tap into a growing population of affluent mainlanders.

“The government welcomes names like us because we create traffic. We can push up the economy in terms of the retail industry,” added Fan. “They need more taxes. If we have more business activity in that region, they can receive more taxation and can fulfill their target with the central government.”

In 2016, the developer will have two projects completed: the Emperor Star City in Shanghai and Emperor Group Centre in Beijing.

Emperor International is an investment holding company that is engaged in property investments, development and the operation of hotels in Hong Kong, Macau and the China. The company operates three segments: lease of properties, properties development, and hotel related operations.

  • 15 May 2012

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