Published September 18, 2013
HONG KONG – China's biggest property developers are sitting on $25 billion in cash as they prepare for a possible credit crunch and another round of crackdowns on real estate speculation.
Companies including Shimao Property Holdings Ltd <0813.HK> and Greentown China Holdings Ltd <3900.HK> raised more than $16 billion in offshore bonds and loans over the first eight months of 2013 - about 36 percent more than in all of 2012. But they have turned more cautious about investing, leaving much of that money on their balance sheets.
China's property sector is a pillar of growth in the world's second biggest economy, accounting for 15 percent of the gross domestic product in the first half of the year. China data released on Wednesday showed new home prices in August rose at the fastest pace in 2-1/2 years strengthening the case for government cooling measures.
Reuters has analyzed data on 76 Chinese property developers that reported June-quarter results, and found that while their cash and short-term investments spiked, their capital spending plans were more conservative.
Thomson Reuters StarMine SmartEstimate data shows China's real estate management and development companies' total capital expenditures are expected to fall 11 percent in the next 12 months, a sharp contrast with property peers in the broader Asia-Pacific region where capex is forecast to rise 6.6 percent.
Developers have curtailed capital spending as the U.S. Federal Reserve's widely expected tapering of bond purchases drives up global interest rates. At the same time, Beijing's renewed crackdown on the country's bubble-prone property market threatens to curb demand, while some cash-starved smaller developers could go bust, flooding the market with cheap property.
"Our financial situation is quite healthy, but we do have concerns for a credit crunch in the industry. The concern does exist for us. We solved our problems already and we are at a very stable situation, but other companies' problems will indirectly affect us - it's all interconnected," said Greentown China Holdings Chief Financial Officer Fung Ching Simon.
"That's why we don't have a very aggressive plan for our sales target for the year."
China has been trying for years to cool property prices, most recently by barring some people in Zhengzhou, the capital of central Henan province, from buying second homes. Analysts expect similar rules in other cities too.
Evergrande and Greentown, two of China's largest developers, both reported jumps of more than 50 percent in cash and cash equivalents in the first six months of the year, helped by strong sales and easy global credit markets.
Greentown said it had raised $1.1 billion via offshore bond issues this year.
"We expanded our funding channels to overseas markets so that we won't be impacted by the domestic conditions as bad as before," said Greentown CFO Fung.
With land prices hitting record highs and authorities renewing their push to rein in house prices, the developers' cash hoards may well prove crucial in a sector where margins are coming under pressure.
The sector's EBITDA margins, a measure of profitability, are the lowest in six quarters as of the June period. In the current year they are expected to rise only marginally to 21.5 percent from 20.7 percent in 2012, according to Thomson Reuters StarMine SmartEstimate data. In 2011, the average EBITDA margin for the sector was 22.6 percent.
"Developers are looking to be more flexible and liquid as a result of capital market, sector and local credit policy uncertainties. Banks will still be accommodative towards the big players, but at least developers recognize the importance of having buffers," said Raghav Bhandari, an analyst with CreditSights, an independent research firm.
Tse Wai Wah, chief financial officer at Evergrande, said the company's land acquisitions would slow the rest of the year, and predicted that smaller developers would feel the brunt of tightening credit conditions.
"Liquidity has been tight since June," he said. "Banks still need to do business and will lend but they will do so selectively. The impact (of tight credit) will be for small-scale developers."
Those smaller developers do not have the same access to overseas credit markets, leaving them reliant on less generous onshore funding. A curb on riskier alternative forms of finance and a credit squeeze in the interbank market have kept funds relatively tight after a shadow bank lending spree that peaked in March. Following tight onshore conditions, shadow banking loans plummeted in July before recovering in August.
CASH BALANCES RISE
China's short-term interest rates shot to as high as 30 percent in late June after the central bank refused to increase the money supply, a decision widely seen as a warning to banks to clamp down on risky lending practices.
Shimao Property Holdings Ltd <0813.HK> highlighted in its earnings presentation in August the importance of speeding up turnover and said it would take steps to "actively deal with credit crunch" including extending the maturity profile of its debt, reducing interest costs and maintaining a higher cash balance.
The company's cash coverage, an indicator of a company's ability to meet its debt obligations, rose to 1.75 times of short term debt as of June 2013 from 1.46 in December 2012. It had 18.9 billion yuan cash on hand as of June 2013, the highest since its stock market listing in 2006.
Cash balances at companies such as Agile Property Holdings Ltd <3383.HK>, Evergrande and Country Garden Holdings Co Ltd <2007.HK> are up 30 to 88 percent over the past six months, according to Thomson Reuters data.
Cash-starved smaller developers are proving tempting targets for some of these cash-rich larger players. According to Thomson Reuters data, some $14.9 billion in mergers and acquisitions have been announced this year, already topping 2012's entire tally of $14.7 billion.
"We could see smaller local guys tempted to sell out to big national guys or Hong Kong players," said Guy Stear, analyst with Societe Generale in Hong Kong.
"We will see more consolidation in the Chinese property sector, like we did in the banking sector. It is far too fragmented," he added.
(Additional reporting by Patturaja Murugaboopathy; Editing by Emily Kaiser and Jeremy Laurence)