Source : Business Times - 10 Jun 2008
Developers face credit squeeze, falling sales and lower prices
A CREDIT crunch, dwindling transactions and falling prices in some hot markets add up to trouble for China’s real estate industry, a key pillar of growth for the world’s fourth-largest economy.
Although official figures show investment in property still grew 32 per cent in the first four months from a year earlier, developers are battening down the hatches as bank loans dry up and the cost of tapping other sources of funds rises.
Dropping home sales is a particular threat to developers, who typically rely heavily on cash from the pre-sale of unfinished projects to fund operations and further expansion.
‘Our strategy now is to safeguard our cash flow. We’re taking a more conservative view of the future,’ Yang Junfang, deputy head of strategic investment for Xinyuan Real Estate, a developer in second-tier cities, told a property forum last week.
All this makes bank regulators and analysts nervous that a new crop of non-performing property loans is on the way.
‘It’s one of our biggest concerns, but we don’t see a manifestation of that in the quality of loan portfolios yet,’ said Charlene Chu with Fitch Ratings in Beijing.
The volume of residential transactions in Beijing fell 13.7 per cent in April from March and was down 56.4 per cent from a year earlier, according to the China Index Academy, which is affiliated with SouFun.com, a top real estate website.
Liu Juan knows all too well that interest in the market is flagging. She and her husband have been trying in vain to sell their Beijing apartment and move into a larger one.
Many prospective buyers have come to look at the flat over the past two months, but none has made an offer.
China does not publish official data on nationwide sales. But it compiles a property outlook index that aims to capture the buoyancy of the market. The index has been falling since reaching a peak last November.
‘Some cities have seen significant falls in real estate transactions, especially since the end of 2007, which poses risks to the short-term operations of listed firms that cannot be overlooked,’ the China Index Academy survey said.
The survey showed that the liabilities of domestically listed Chinese developers reached 76.5 per cent of their assets at the end of last year, up from 69.1 per cent at the end of 2006. The 70 per cent mark is seen as a warning threshold.
And while average property prices in 70 cities were up 10.1 per cent in April from a year earlier, prices have already seen monthly declines in the prosperous Pearl River Delta region of southern China, especially in the boomtown of Shenzhen.
‘I tend to believe that property prices in cities such as Beijing, Shanghai and Hangzhou will enter an adjustment phase in the last two quarters of this year,’ said Zhong Wei, an economics professor at Beijing Normal University.
Chinese developers are trying hard to shore up their capital base. Many are seeking to team up with international funds, which are thus able to drive a harder bargain. Before last October, when the credit crunch worsened, the shoe was on the other foot.
However, potential foreign investors have to overcome daunting regulatory hurdles.
‘It takes half a year to bring the money in and takes forever to get it out,’ said Craig Blomquist, chief executive officer of Fan Ya Tai Asset Servicing Consulting in Guangzhou.
As well as tightening bank credit, regulators have sought to slow property inflation by approving only two domestic IPOs and four corporate bond issues for real estate firms this year.
As if that were not enough, weak investor interest has forced some Chinese developers such as Evergrande Real Estate Group to ditch plans for initial public offerings in Hong Kong.
With no sign of an easing in the credit squeeze, cash is king. Building a land bank and waiting for prices to rise is no longer an easy option because it ties up a lot of money. — Reuters
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