Developers to beat tough times

PUBLISHED : Monday, 19 March, 2012, 12:00am
UPDATED : Monday, 19 March, 2012, 12:00am


Mainland developers are in for hard times this year, but a loan default by a cash-strapped homebuilder is unlikely despite tough operating conditions and a tight credit market, say analysts.

Home prices in nearly two-thirds of the 70 mainland cities tracked by the government fell last month. The price of new homes fell in 45 cities last month, down from 48 in January, the National Bureau of Statistics said. Prices were stable in 21 cities and rose in four, it said.

Analysts said developers could make big price cuts as early as this month to encourage buyers back into the market and help generate revenues.

Predictions of a gloomy outlook for developers - but welcome price relief for buyers - came after Premier Wen Jiabao last week reiterated the government's intention to maintain the cooling measures in place for the property market.

At a press conference on Wednesday that concluded the 2012 National People's Congress meetings, Wen said home prices were still far from reasonable. Getting prices back to normal levels meant they should be in line with household income levels and matched by reasonable profits, he said.

Alan Jin, an analyst at Mizuho Securities Asia, said: 'The affirmative tone of keeping tight controls intact indicates that policy reversion may take longer to occur. Previously, the market expected this before the NPC meeting.'

In light of the continued tough operating conditions, Jin said he expected developers to accelerate sales at lower prices in the second quarter.

This view was echoed by researchers at financial advisory firm CCB International, who said in their latest research report that developers would face higher trust refinancing pressures in the second half of this year.

According to the Trust Industry Association, 688.2 billion yuan worth of trust loans were outstanding at the end of last year, a jump of 50 per cent year on year.

Trust companies are non-bank institutions that sell a range of investments, including property-backed loans, to private individuals. Builders have turned to the trusts for funding after the government ordered state-owned banks to restrict lending to the sector.

'Cash received from property pre-sales seems to be the only way to cope with the burden of trust refinancing,' said the CCB report. 'We believe the offloading of property by developers lowering prices is just around the corner and, as a result, we expect aggressive sales activity and a sharp rise in transaction volumes.'

On March 8, ratings agency Standard & Poor's warned in a report on mainland developers that more credit downgrades were likely in the next six months.

'Many developers in China may be at increased risk of refinancing due to weaker property sales, high funding costs, and tightened liquidity. And that will increase the pressure on ratings,' S&P credit analyst Bei Fu said in a news release.

In the past month S&P has downgraded Yanlord Land, Coastal Greenland, Yuzhou Properties, and Zhong An Real Estate. It said small developers concentrated in certain cities and projects were vulnerable to policy risk, while bigger, diversified developers, stood to benefit.

S&P predicted that mainland home prices could drop 10 per cent over the 12 months to June.

Hugo Hou, an analyst at Haitong Securities, said liquidity was tight but it has improved compared with the second half of last year.

Property sales picked up slightly in the first two months of this year and some developers have successfully arranged offshore funding, such as bonds or share placements, to ease their cash-flow positions, Hou said. No developers - big or small - will go bust this year, he predicts.

However, Jin said he would not be surprised if trusts or small developers, such as unlisted single-project companies, defaulted. He did not expect any listed developers to face a loan default.