Shanghai Forte IPO tests faith in China's housing market

Shanghai Forte Land Co (上海復地集團), the biggest developer in China's largest commercial city, aims to be the first private property company to sell shares overseas, one month after rival Soho China Ltd (Soho中國) scrapped a similar ambition.

Shanghai Forte is bidding to lure investors with a focus on China's emerging middle class, whose average income almost doubled in five years. The company wants to raise HK$1.2 billion (US$153 million) and will set the price for its shares tomorrow.

The sale is a test of investor appetite for the Chinese real estate market, where price rises of as much as 25 percent in two years prompted the government to tighten mortgage approvals to prevent a possible bubble.

"A successful sale for Shanghai Forte helps future sales by Soho and others," said David Chapman, who helps manage US$650 million in global shares at Towry Law Asia Ltd. "A failed sale slams the door shut."

Shanghai Forte is offering to distribute half its profit as dividends and may price its shares at 8.5 times forecast 2003 earnings, cheaper than the price planned by Soho.

Soho delayed an initial share sale last year after its banker, Goldman Sachs Group Inc, and other banks disagreed over forecasts that the Beijing-based developer would quadruple earnings to meet its 2003 profit forecast, bankers involved said in October.

Shanghai Forte is focusing on Shanghai, which Chinese Premier Zhu Rongji (朱鎔基) called Asia's New York, and whose residents have the highest per capita income in the nation.

The company as of December owned stakes in 36 developments in Shanghai, totaling 2.1 million square meters, and plans to develop eight more projects in the city, encompassing 1.71 million square meters of floor space. It plans to more than double its property portfolio in Shanghai, Beijing and central Wuhan to 4.4 million square meters of gross floor area, share sale documents show.

Demand for privately owned housing in China tripled since 1998, according to DTZ Debenham, after the government said it was no longer necessary for state-owned companies to provide their workers with housing.

The growth rate has sparked concern in Beijing. In October, Zhu instructed commercial banks to tighten controls over mortgages in a bid to cool a market that was showing signs of oversupply and falling prices.

Last week, the government said it will freeze approvals for construction of luxury homes and tighten supervision to slow the building of expensive housing.