More developers face troubled times

Property sector has been experiencing weak sales and negative sentiment

An increasing number of Chinese property developers are facing bankruptcy as their credit dries up and weak sales reduce their cash flow to a trickle.

"We welcome investment from any company that can address our problems," Guo Yaoming, chairman of Guang Real Estate Group Co Ltd, told Southern Metropolitan News.

The property developer, which is based in Shenzhen, Guangdong province, said in an online statement that the delivery of "a small number" of housing units in Huizhou in the province had been delayed.

According to Guo, a capital injection of 300 million yuan ($48 million, 34 million euros) to 500 million yuan would allow the company to weather the current crisis.

The company has expanded rapidly in recent years, taking out a three-year private loan of 1.5 billion yuan to do so, only to see housing sales plummet. It has projects in 12 cities, and it employed 2,300 people at the end of 2012, the latest figure available according to its website.

Guang Real Estate is not the only property developer facing financial woes this year.

In March, Zhejiang Xingrun Real Estate Co, in Fenghua, a small city in Zhejiang province, was on the verge of bankruptcy. Published estimates said the company owed 15 domestic banks a total of 2.4 billion yuan and individual investors another 1.1 billion yuan, although it had only 3 billion yuan of liquid assets. The company was at one time the largest developer in the city.

Media reports in May said nobody had heard from the chairwoman of Qingdao Junlihao Holdings Ltd since late April. The company's debt could exceed 1.2 billion yuan, reports said.

Given sliding residential sales and prices in many cities, it is no surprise that concerns about the debt of overstretched borrowers continue to mount.

According to a report by Goldman Sachs Group Inc & Gao Hua Securities Co Ltd, the financial situation of 110 developers listed on the A-share market deteriorated in the first quarter. Those woes are likely to depress apartment prices during the second quarter, the report said.

About 30 percent of bank loans are estimated to be tied to real estate, and land and property are used as collateral for most loans, according to Roubini Global Economics LLC.

The restructuring of Chinese home builders that began early this year will force uncompetitive developers out of the market and help mitigate oversupply risks in the long term, a report by Fitch Ratings Inc, says.

China's property sector has been experiencing weak sales and negative sentiment, along with tighter domestic funding and big differences in how the property markets in different cities perform. This restructuring has led to the separation of stronger developers from weaker rivals, Fitch said.

"Given that nationwide housing demand is still strong and rated developers only account for about 33 percent of market share, there is still room to grow for stronger-rated developers after restructuring and consolidation," the report said.

James Shepherd, head of research for greater China at Cushman & Wakefield Ltd, agrees with that assessment.

"We anticipate more consolidation in this lackluster market. Major listed developers will outperform in this volatile environment, with their solid financial positions and access to varied financing channels," Shepherd says.

A case in point is the acquisition by Hong Kong-listed Sunac China Holdings Ltd of a 24.3 percent stake in Greentown China Holdings Ltd of Hangzhou, Zhejiang province, for about 5 billion yuan. That marked the biggest such acquisition in China's real estate sector this year.

Many developers are making greater efforts to improve product designs or add more value to survive the fierce competition.

"We recently received more inquiries from property developers to help them better understand the real needs of customers," says Yan Xuan, president of Nielsen Greater China.

For example, Franshion Properties (China) Limited, the Hong Kong-listed real estate arm of Sinochem Group, uses green buildings as a core strategy to boost competitiveness.

The company will invest 2 million yuan this year in research and development of green technology, says Sun Guodong, the company's chief designer.

"We did a lot of research on green buildings last year and plan to increase our investment in this field to 2 million yuan this year," Sun says.

The company has signed a deal with the China Academy of Building Research and Shanghai Architecture Science Institute to promote cooperation in research on green buildings.

Shoucheng Real Estate Co, a Beijing-based property developer, will develop more three-bedroom apartments and villas in its projects in the city's Pinggu district, hoping to attract buyers aiming to upgrade. The project racked up nearly 1 billion yuan in sales last year, thanks to its precise market positioning.

But even as some developers struggle to survive, most analysts say China's property bubble is not about to burst - at least not yet.

London-based financial service provider Barclays says the bubble will gradually deflate over 2014-15, based on price-sales dynamics, the central government's stance and "bottom line" management by developers. It also cited "judicious" cyclical government policies such as monetary easing and the loosening of purchase restrictions.

"We believe the government will likely tolerate some further correction, although not too steep, and also allow local governments more discretion to use differentiated housing policies that fit local situations," says Chang Jian, China economist with Barclays.

The financial services company UBS AG says the central government can still use policy to mitigate the downturn.

"We believe the government still has the means and willingness to mitigate a property downturn, including by increasing infrastructure investment and relaxing property policies," says Wang Tao, China economist with UBS.

"As such, our base case forecast is for the property downturn to remain manageable."

huyuanyuan@chinadaily.com.cn

(China Daily Africa Weekly 05/30/2014 page14)