Property stocks fall on sales and debt fears

Mainland property stocks fell across the board yesterday as investors feared that declining property sales and higher debt ratios could hit cash flows, especially if Beijing tightened credit further.

In response to its poor property contract sales results, shares in China Overseas Land & Investment (Coli) dropped 7.5 per cent yesterday to close at HK$14.30, making it the worst blue-chip performer. The fall came after it announced last Friday that property sales declined 11.2 per cent to HK$4.4 billion in August from a year earlier, and sales volumes tumbled 12.9 per cent to 331,600 square metres year on year.

Evergrande Real Estate's stock lost 9.2 per cent to close at HK$3.73 before it announced its year-to-date sales performance tomorrow.

Highly geared mainland developer Agile Property also plunged to a 52-week low to end at HK$8.55, down 6.55 per cent from last Friday. Guangzhou R&F also declined to a 13-month low to close at HK$7.39 and CC Land plunged to a 52-week low of HK$1.96.

The fall accompanied a drop in the Hang Seng Index, which fell to its lowest level in more than 15 months, closing at 19030.54 points, down 836.09 points from Friday. The nosedive was prompted by fears over the deteriorating European debt crisis.

Jinsong Du, an analyst at Credit Suisse, wrote in a real estate report that some developers had lagged behind their schedules in project completions or delivery in the first half. Other developers had already slowed down their new land acquisitions, given the sluggish market, which had helped them save cash.

'But almost every developer's net gearing climbed in the first half of this year compared with the end of the 2010 financial year, mainly due to the land premium payment for previous land acquisitions, as well as a lower sales-proceeds-collection ratio,' Du said. Many developers had to catch up with their completion schedules to meet their full-year delivery targets, and needed to spend more on construction in the second half, he added.

The net gearing ratio at Agile rose to 65.9 per cent in the first half of this year, up from 53.9 per cent last year. Evergrande's increased to 80.5 per cent in the first half from 54.3 per cent last year and Coli's rose to 38.6 per cent from 22.9 per cent last year, Credit Suisse said.

In an attempt to achieve their full-year contracted sales targets, most developers expect to speed up sales in the second half, which may create an oversupply.