Smaller Chinese Developers Squeezed Out

Thomson Reuters’ StarMine reports that half of Chinese developers lost revenue in the most recent fiscal year, and now it appears local Chinese banks are tightening funding to …

Thomson Reuters’ StarMine reports that half of Chinese developers lost revenue in the most recent fiscal year, and now it appears local Chinese banks are tightening funding to smaller property development firms. The additional lack of available international funding in the wake of the Eurozone crisis is leaving many of these businesses with nowhere to turn, say market analysts. Many developers are leaving the market, while those that are fighting to stay afloat are forced to slash prices already falling home prices to make deals. Bigger firms argue they, too, are feeling the pinch, and that only truly large development firms like China Vanke and China Overseas Land are faring well in the market. For more on this continue reading the following article from Property Wire.

Property developers in China are slashing prices in a desperate bid to get money coming ton as falling home prices and sales are pressuring liquidity and margins, it is claimed.

There are even concerns that some of the smaller developers may collapsed. Some have dropped prices by up to 30% as they are finding it increasingly difficult to borrow money.

Local banks are cutting off lending to developers at Beijing’s direction and global markets are all but impossible to access because of the current eurozone crisis.

‘It indicates what they see as the outlook for the next six to 12 months. The game plan is to secure volume now. You want cash flow rather than margin,’ said Stephanie Lau, China property analyst at Mirae Asset Financial Group.

Half the property companies listed in China and Hong Kong saw cash flows dropping for their most recent fiscal year, according to data from Thomson Reuters’ StarMine. And 115 of the 261 companies reporting profits saw margins shrink.

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ANZ’s credit trading team said they see a real risk of one or two developers defaulting on their bonds, which is spreading contagion even to the top developers.

Greentown China Holdings has the worst credit rating among Chinese developers, according to data from StarMine, with a score of just one out of 100. SRE Group scored five, while Evergrande Real Estate and Coastal Greenland both have a score of 6, well below the sector’s average of 48.

Greentown China, SRE and Shanghai Industrial Urban Development Group also have poor credit ratings from ratings agency Standard & Poor’s. However, the companies said they did not face any risk of failure despite difficult market conditions.

Since August, S&P has downgraded Coastal Greenland, Shanghai Zendai Property and SPG Land on reasons ranging from weak liquidity to refinancing risk and loan-covenant breach.

The agency rates only three of the 30 Chinese developers it tracks as investment grade: China Overseas Land & Investment Ltd, the country’s largest property developer by market value, China Resources Land and Franshion Properties.

Average home price in China’s 100 key cities fell 0.23% in October from a month earlier, the second straight monthly drop, a survey said. But data from Thomson Reuters’ Datastream sends a more worrying sign about China’s cooling property market.

The average sales price index of the residential market in China has gradually fallen since February last year and stands at 100, just five points shy of its all time low of 95 in early 2009.

‘Bigger companies are making big cuts because they need sustainable growth. Smaller companies might just sell out whatever units they have and then go into hibernation,’ said Nicole Wong, the head of Hong Kong and China property research at CLSA Asia-Pacific Markets.

Some developers have even opted to exit the residential sector altogether. Shenzhen listed Yang Guang Co has said it will focus on commercial development, instead of also building homes. Last month it agreed to sell four residential projects to Beijing Capital Land for 1.6 billion yuan ($252 million).

Among a handful winners are large developers such as China Vanke and China Overseas Land, analysts said. China Vanke is well positioned to benefit from the slump because it focuses on smaller, first home properties, which are more resilient and not being targeted by Beijing, according to CLSA’s Wong.

This article was republished with permission from Property Wire.

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