Cash-strapped developers sell assets

PUBLISHED : Wednesday, 30 April, 2008, 12:00am
UPDATED : Wednesday, 30 April, 2008, 12:00am

Private companies find way to improve cash flow and cut debt amid falling prices

Mainland developers are under growing pressure to repair balance sheets that are beginning to show the strains of high debt levels at a time of falling property prices and sales.

With share prices and debt ratings tracking the decline in their fortunes, and fund-raising on stock and bond markets becoming a difficult option, asset sales to local and foreign investors have begun emerging as an alternative solution, say analysts.

'Asset selling will become a hot trend,' predicted Coastal Greenland director and chief financial officer Paul Cheng Wing-bor.

The small developer sold stakes in two of its projects to United States-based Angelo Gordon last year. It plans to pursue this strategy.

Tougher lending policies and delays in approvals for A-share listings have added to the cash-flow woes being faced by some developers at a time when poor stock market sentiment has put several share sale plans on hold.

CCB International Securities analyst Raymond Cheng Wai-mo said several listed developers had started selling off assets to diversify investment risk, even though property sales in some mainland cities were showing signs of picking up.

Guangzhou-based China Aoyuan Property Group on April10 announced it had signed a memorandum of understanding to sell a 50 per cent stake in a retail mall it is developing in Panyu district to MGPA, a real estate fund operated by Australian financial services provider Macquarie Group.

Agile Property Holdings, meanwhile, is in talks to sell minority stakes in two residential projects - one in Hainan and one in Huizhou - as it moves to improve its cash flow and reduce debt.

And Beijing North Star, the developer with investments primarily in the capital, has told analysts it will consider selling assets if property sales continue to shrink amid a slowing Beijing real estate market.

Private developers are expected to face greater pressure than their larger listed rivals. Of the estimated 50,000 mainland developers, some 120 firms are listed while most are small, single-project firms.

Da Peng Properties, the mid-sized developer of Grandview Mall in Guangzhou, is looking for buyers for the serviced apartment portion of its 49-storey serviced-apartment-hotel development which will be built next to the mall.

The serviced apartments will be located at the 33rd floor to the 49th floor of the tower, and the hotel will be operated by JW Marriott.

'The current tough business environment is testing developers' ability to manage their rapid growth plans and those that fail to maintain strict financial discipline and in particular, disciplined liquidity profiles, risk downward pressure on their ratings,' said Kaven Tsang, assistant vice-president of Moody's Investors Service.

The balance sheets of mainland property developers reveal an industry that has borrowed heavily to fund an increasingly competitive campaign to acquire land for future developments, Mr Tsang said.

The high gearing was partly caused by the huge inflow of liquidity from the US and Europe last year as institutional investors sought exposure to the booming mainland property market.

With that capital backing, land-hungry developers had acquired more development sites to boost their asset valuations before going public, said analysts.

For several developers this aggressive strategy had now backfired.

Mr Tsang said debt-to-capital ratios of the 13 developers Moody's rated were about 50 per cent.

The rating agency had flagged concerns over some companies such as Hopson Development Holdings and Coastal Greenland, which had even higher debt-to-capital ratios, he said.

Most listed companies still have sufficient cash from their bond and equity issuances last year, according to Mr Tsang, provided they do not pursue any further large land acquisitions during the remainder of the year.

Analysts said those developers that failed to maintain strict financial discipline - in particular those that had bought a lot of expensive sites last year and were now required to pay land premiums this year - would face increasing funding pressure.

Guangzhou R&F Properties, which bought 20 sites last year, has a gearing ratio of 140 per cent, one of the highest among Hong Kong-listed mainland developers. Last year, it paid interest on bank loans of 909 million yuan (HK$1.01 billion), against 323 million yuan a year earlier.

The company is awaiting approval for its A-share listing plan.