SHANGHAI (BLOOMBERG) – Surging demand for butler-like concierge service at the millions of condominiums in China is creating one of the hottest sectors in the nation’s stock market.
Property management companies, providing everything from childcare to shopping errands for residents in China’s densely populated communities, have soared this year as the pandemic kept workers at home.
Ever Sunshine Lifestyle Services Group, spun off from Cifi Holdings Group, has almost tripled this year. Yincheng Life Service has surged nearly 400 per cent, while Times Neighborhood Holdings has doubled. Overall, housing service stocks in Hong Kong have jumped 60 per cent on average, topping the 47 per cent rise by Chinese consumer stocks in Shanghai and the 29 per cent gain for technology firms.
“The sector has become highly favoured by investors, almost like they’re consumer or tech stocks,” said CGS-CIMB Securities property analyst Raymond Cheng. “We have seen global funds from Singapore to the US piling onto it.” China’s highly indebted property developers are taking note, seizing on the rally to list their service arms in Hong Kong and raise money to pare debt. Thirteen Chinese developers have started or flagged intentions to spin off their management units this year, a record since 2017 when the trend emerged.
A dense neighborhood in China can have as many as 100,000 condominiums, creating a captive market for versatile services. Residents – especially the elderly and those with young children – are increasingly using these butlers to buy groceries and medicine, rent out their investment properties, or even baby sit their children.
While listings picked up about two years ago when the property arm of Country Garden Holdings, the nation’s largest residential builder, started trading in Hong Kong, the major valuation boost has come this year.
Spinning off property management units gives developers much needed funding, especially as they face the biggest liquidity test in more than four years. China Evergrande Group, the nation’s most-leveraged major developer, and Sunac China Holdings last month joined smaller rivals in announcing listing plans.
Evergrande’s addition of strategic investors into its privately-held services unit, a move widely seen as a pre-listing move, has helped the developer lower its net debt to equity by 19 percentage points, President Xia Haijun said on an earnings call last month.
“For developers, both their financial pressure and splendid valuations of service firms lure them to the wave of IPOs,” said Kristy Hung, property analyst at Bloomberg Intelligence. “For those debt-laden builders, having one more listed entity means more versatile fund-raising channels.”
Unlike developers that face uncertainties from a cyclical slowdown and government restrictions, the property management business is shielded from China’s property curbs. Its advantages include a stable model with recurring fee revenue and low leverage.
Investors also like the growth outlook, as sprawling new apartments built by their parent developers translate into new business. The bigger players are also on a fast expansion track by swallowing smaller rivals.
“It’s an attractive, long-term investment opportunity that only exists in China, ” said CGS-CIMB’s Mr Cheng, who estimates the industry’s market value will quadruple to US$180 billion by 2025. “No other country has so much floor area to manage.” Still, the stock surge has pushed valuations well above the property parents, raising concerns about stretched prices. At least 10 companies trade at more than 47 times trailing 12-month earnings, in line with Kweichow Moutai, the spirits maker that’s one of China’s most loved stocks.
“The sector’s share prices may come under pressure in the next two to three months,” China International Capital analyst Eric Zhang wrote in a report. “The slew of upcoming IPOs will likely dilute investors’ funds. And as earnings season passes, there isn’t much catalyst left in the short term.”