China’s big property swap suggests Beijing is getting serious about making its giant state firms more focused. CITIC, a conglomerate which dabbles in everything from finance to football, is offloading most of its mainland residential real estate to a government-controlled rival in order to focus on commercial development. The $4.77 billion deal is a sign of constructive reform.
CITIC is hiving off assets strewn across 25 Chinese cities. In return, it will get a portfolio of commercial real estate worth almost $1 billion and the balance in the form of newly issued shares equivalent to a 10 per cent stake in the enlarged China Overseas Land & Investment (COLI).
It looks like a decent deal for CITIC, which will pocket a sum equivalent to 1.6 times the trailing book value of the assets it is offloading. That is twice its own valuation for the last 12 months and an 18 per cent premium to the multiple investors put on COLI, a more focused property group, according to Eikon.
The only obvious blind spot is that CITIC hasn’t told shareholders which exact assets they will be getting in exchange. That makes it hard to judge which side has the better end of the swap. CITIC also has to hold onto its COLI shares for at least two years.
Nonetheless, the deal helps CITIC with some internal housekeeping: as part of the reshuffle it will combine all its property assets into a single subsidiary. It is similar to a move COLI made a year ago when it bought assets worth $5.5 billion from its unlisted parent, consolidating the group's property portfolio.
Taken together with a handful of other deals, this adds up to a concerted effort to streamline China's state-controlled real estate sector.
When the People's Republic promised to overhaul state companies back in 2013, few believed that hard reforms would follow. CITIC's effective reverse listing on the Hong Kong stock exchange almost two years ago was met with similar scepticism. The big property swap suggests reform of state-owned enterprises is finally gathering pace.