The housing price data for 70 major cities released on June 18 is grim. For the first time since June 2012, the month-on-month housing price index turned negative. As the entire market enters a cooling channel this year, inventory pressure on various real estate enterprises continues to increase. Although many developers have increased promotional efforts, it is clear that buyers are not buying it and instead choose to continue a wait-and-see attitude, which further slows down the capital turnover speed of developers.

Falling housing prices are naturally not a pleasant thing for real estate enterprises, especially small and medium-sized ones. Because falling housing prices are accompanied by a decline in transaction volume across the entire market. Judging from the high-profile sales targets set by developers this year, such developers will find it difficult to boost sales performance due to declining sales prices. The worst part is that the overall transaction volume has not risen because of the price decline. The strategy of small and medium-sized developers to exchange price for volume has failed.

Compared with large developers, small and medium-sized developers dislike the effects of such housing price declines even more. The reason why such small and medium-sized developers entered the real estate development market at the time was that they had their eyes on the space for rapid housing price growth. Now that housing prices have seen a month-on-month decline, it is naturally a great harm to their profit targets. More importantly, some small and medium-sized developers, despite good performance last year, gritted their teeth and acquired land at high prices, hoping to gain benefits from rising housing prices. Unfortunately, housing prices in some cities this year may show signs of decline. Such small and medium-sized developers themselves have relatively weak brand power, and expanding market share in the future is obviously a luxury.

While the property market situation continues to deteriorate, financial credit has not been substantially relaxed, which naturally hits small and medium-sized developers harder. Large listed developers can broaden financing channels through the A-share market and overseas markets, but small and medium-sized developers have no way out. Under such circumstances, more and more small and medium-sized developers choose to conduct equity transactions at equity exchanges, which is naturally in line with expectations. The author believes that such a strategy will also become mainstream.

According to listing data from the Beijing (property projects) Equity Exchange, several small developers from Wuxi (property projects) have conducted equity transactions here this year. Such developers are wholly state-owned enterprises, yet they still find it difficult to seek market space locally. This is closely related to the poor inventory destocking situation in the Wuxi property market. Such small and medium-sized developers have overly narrow sales channels, deviated product positioning, and weak pricing power, so they are easily eliminated under market competition.

Worse still, even if the market does not cool down, the way out for such small and medium-sized developers will be relatively narrow. Observing the current top 50 land acquisition ranking of enterprises in the land market, there is almost no presence of small and medium-sized developers. It is difficult for developers to acquire land, so their business will naturally narrow. More seriously, many enterprises that do not take real estate as their main business will find that losses in the real estate segment are gradually eroding the development of their main business. The pattern of "big fish eat small fish, small fish eat shrimp" is becoming prominent, and equity exchanges naturally become a "shelter" for the survival of small and medium-sized developers.

So, what characteristics do such developers entering equity exchanges generally have?

Judging from economic, business, performance and other indicators, such small and medium-sized developers mostly have the characteristic of being frail. Generally, their registered capital is at the level of 2 million to 100 million yuan, with 20 to 50 employees, and most are comprehensive real estate development enterprises with second-level qualifications. Their economic nature is basically limited liability companies, and enterprise types even include state-controlled enterprises. Such developers have poor operating performance, with annual sales of less than 2 billion yuan. From the perspective of business structure, such developers operate in a relatively "miscellaneous" manner. In addition to development, they are also involved in construction, property management, home decoration, materials supply and marketing, and other businesses.

In the past, small and medium-sized developers also had such enterprise resource endowments, so why could they survive? The key point lies in the factor of financing channels. Previously, such developers could rely on trust instruments and other tools to obtain funds. Although the cost was high, the appreciation speed of real estate projects would quickly catch up with such financing costs, thereby providing a continuous cash flow for subsequent development. However, with increasing concerns about trust defaults and tightening bank credit, such small and medium-sized developers will find it increasingly difficult to develop financing channels.

Although the state has always protected small and medium-sized enterprises, the real estate industry is obviously different from this tone. In the past, such small and medium-sized developers could profit under institutional dividends, but with industrial structure adjustment, higher corporate governance requirements, and intensified corporate auditing, many small and medium-sized developers have gradually lost their economic and political advantages. When the profit space in real estate narrows, such small and medium-sized developers will seek the "shelter" of equity exchanges.

Equity exchanges have become a circle for such poorly performing developers. Then, if other developers enter, will it damage corporate self-esteem? In fact, what equity exchanges provide is a mechanism and venue for restructuring financing channels, and this is the original intention of establishing such platforms. When business and financing channels narrow, many small and medium-sized developers can just find new opportunities on this platform.

From this perspective, the equity sell-off of small and medium-sized developers is not a bad thing; it is precisely an important way for companies to achieve a transformation of governance structure. So, before small and medium-sized developers enter this market, which indicators should they prioritize? From the perspective of stable performance growth and property rights independence, small and medium-sized developers are obviously unwilling to enter equity exchanges too early. However, from the perspective of preserving enterprise assets and obtaining new financing channels, when some operating and financial indicators issue warnings, developers need to consider entering equity exchanges.

From the perspective of operating scale, if a developer's annual sales are less than 100 million yuan, it is basically an enterprise that will have difficulty expanding performance in the future. If there is still an intention to continue development in the future, then selling part of the equity and improving the governance structure is the optimal strategy.

From the perspective of financial indicators, when the asset-liability situation continues to deteriorate, entering equity exchanges should also be considered. When liabilities approach or even exceed assets and the enterprise's subsequent saleable inventory is insufficient, such small and medium-sized developers need to shift from "selling buildings" to "selling the enterprise." At this time, it is often also when both operating profit and net profit are negative. From the perspective of reducing enterprise capital loss and controlling the cost of capital occupation, getting involved in such equity transactions as early as possible is the best policy.

Among the developers currently listed on major equity exchanges, the listing prices are mostly below 1 billion yuan. Therefore, from the perspective of enterprise valuation, when the future valuation of a developer moves below this level, involvement in equity transactions should also be considered.

Of course, the simplest method is to check liquidity indicators. When the cash flow situation is tight, toughing it out is not conducive to enterprise growth. Because in this way, the funding gap will only grow larger.

In practice, the scale of liabilities is easy to determine, while the book value and appraised value of asset scale can differ greatly. Therefore, small and medium-sized developers need to consider this point when assessing value. After all, small and medium-sized developers have limited financing channels, and a slightly higher leverage ratio may further increase investors' concerns, thereby affecting the enterprise's valuation and the final equity transaction.

Once it is clear to enter the equity exchange, developers need to consider transaction strategies. From the perspective of equity segmentation, there are nothing more than two strategies, corresponding to different operating goals. The first is the "cutting losses" strategy, that is, only part of the developer's equity is listed. Such a transaction helps subsequent project development. It is beneficial for small and medium-sized developers to ease funding pressure, introduce new investors, and improve corporate governance structure. The second is the strategy of signing an "indenture." Under such a strategy, the developer sells 100% of the equity. Such a transaction can realize the liquidation of the developer's assets and is conducive to new industrial expansion.

In equity transactions, how to price equity becomes key. Small and medium-sized developers need to "window-dress" their equity value under compliant conditions. First, they should communicate in detail with asset appraisal companies, law firms, accounting firms and other institutions, and focus on showing enterprise value to a greater extent while respecting data. At the same time, in equity exchanges, it is not necessarily necessary to conduct transactions through listing. Judging from the actual transaction situations of many equity exchanges at present, many belong to the private negotiation model. Under such a model, if small and medium-sized developers have not reached the point of "having to sell," then they can be tougher on pricing, that is, they should be good at amplifying equity and enterprise value.