Alarm as top mainland developers go into red
Weak sales, credit crunch take toll as most top 30 firms record negative cash flow and rack up debts
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Weak sales, credit crunch take toll as most top 30 firms record negative cash flow and rack up debts
Peggy Sito
30 April 2012
Mainland developers’ financial health has raised warning bells, as most of the top 30 listed players record negative cash flows and post debt ratios exceeding the last big downturn in 2008.
As sales slow and unsold inventory pile up, property experts expect some listed developers to seek a white-knight rescue and more privately run ones to go bust.
Among the top 30 developers listed in the Shenzhen and Shanghai A-share markets, 22 recorded a negative cash flow in the last quarter of 2011. The other eight who fared better include industry leaders such as China Vanke and Beijing North Star, according to a research report by global property consultant DTZ.
The debt ratio of 13 developers has crossed 70 per cent while unsold inventory turnover rate has shot up to an average of 1,667 days. A higher rate indicates the difficulty in selling property.
“In terms of debt ratio, the current situation is worse than in 2008,” said Alan Chiang Sheung-lai, DTZ’s head of residential property in China.
Many of the Hong Kong-listed mainland developers have seen their net gearing, a measure of a company’s leverage, exceed 2008 levels.
Greentown China’s net gearing surged to 195 per cent at the end of last year from 118.5 per cent in 2008, while Poly Hong Kong’s figure rose to 103 per cent from 62.4 per cent.
Agile Property Holdings saw its gearing rise to 68 per cent last year from 37.3 per cent in 2008, according to Mizuho Securities Asia.
Credit-rating agency Standard & Poor’s (S&P) warned in a report last month that the worst was yet to come.
“Many developers in China may be at increased risk of refinancing due to weaker property sales, high funding costs and tightened liquidity. And that will increase the pressure on ratings,” the agency said.
Chiang of DTZ said the debt position worsened mainly because developers had hoped the market correction would be brief, as in 2008, and that they would be able to survive on short-term loans even if they came at exorbitant interest rates. “It turned out that it was not the case,” he said.
In the 2008 property downturn, just seven of the 30 developers had reported positive cash flows. The unsold inventory turnover rate averaged at 1,719 days in the fourth quarter of 2008. However, the central government’s four trillion yuan (HK$4.9 trillion) stimulus package had saved the industry.
But this time, Chiang says, “the central government wants to see a consolidation in the industry, and wants more vulnerable companies to go bust or reorganise”.
“I won’t be surprised if listed companies invite joint-venture partners to invest in their projects or approach investors to buy a stake in their companies,” he added.
Greentown China and its mainland partner have agreed to sell 70 per cent of their stake in a prime development site in Shanghai for 2.13 billion yuan.
Paul Guest, a research analyst at LaSalle Investment Management, echoed the view that industry consolidation was one of the goals in the current round of cooling.
DTZ says there is no respite on the loan front either. In fact, lenders like China Construction Bank have stopped granting loans to small and medium-sized developers.
As credit dries up, construction delays and larger discounts are becoming increasingly common, even among big players. For some smaller firms and in some cities, prices have already slumped by as much as 40 per cent from their launch price tags.