Chinese developers face debt pressures

Rising capital expenditure is a growing concern among property firms as their aggressive land acquisitions keep driving gearing levels higher

PUBLISHED : Tuesday, 08 October, 2013, 12:00am
UPDATED : Wednesday, 09 October, 2013, 4:40pm

The cheering and applause could be heard for miles around the Tianhe Stadium last Wednesday when Guangzhou Evergrande beat Japan's Kashiwa Reysol to become the first Chinese side to qualify for the AFC Champions League soccer final.

But the property developer that finances the club, Evergrande Real Estate, has few such enthusiastic fans at the moment.

Evergrande, one of the mainland's biggest developers by land bank size, is currently wrestling with rising debt pressures due to the rapid accumulation of development sites.

While year-to-date sales revenues have been strong, its cash inflows are still not able to offset rising outflows. As a result, its net gearing is heading higher, as is the case for many mainland developers at the moment, although Evergrande could be an extreme example, according to Lee Wee Liat, head of property research in Asia at BNP Paribas Securities.

According to Centaline Property Agency, the country's 10 major developers including Evergrande, China Vanke and Poly Real Estate spent about 135 billion yuan (HK$170.4 billion) on land acquisitions in the first seven months of this year, compared with 155.8 billion yuan for the whole of last year.

"Rising capital expenditure is a concern for Evergrande, given its net gearing levels. Its net-debt-to-equity ratio could be up to 134 per cent at the end of June this year, including outstanding land premiums of 43.65 billion yuan," Lee said. Excluding the premiums, the gearing was estimated at 58 per cent.

"More than 80 per cent, or 59 billion yuan, of its total debt needs repaying in two years," Lee added.

Any further land acquisitions could lead to higher-than-expected gearing for the developer, which already had 262 projects under way across 140 cities, according to BNP.

"But Evergrande is an extreme example. It acquired a lot of sites and the premiums on some sites have not been fully paid. Other developers could be in a better situation," Lee said.

In the first seven months of the year, Evergrande was estimated to have spent more than 20 billion yuan on acquiring development sites. Last month, the firm outbid eight rivals to acquire a site in Beijing for 4.04 billion yuan.

According to Macquarie Securities, the median net gearing level of the 20 mainland developers it monitored could be 64 per cent at the end of June this year. Evergrande's net gearing then stood at 63 per cent, it calculated, and this was expected to increase to 89 per cent by the end of this year.

Another developer with high gearing is Guangzhou R&F, which saw its net gearing jump as high as 101 per cent at the end of June, but Macquarie expected the ratio to drop to 82 per cent by the end of this year.

Overall, the average net gearing at developers would decline to 44 per cent by the end of this year from 64 per cent due to strong property sales, said David Ng Ka-chun, head of China and Hong Kong property research at Macquarie Capital Securities. But their gearing ratios could go up if they continue to buy land sites aggressively in the coming months.

Meanwhile, some mainland developers such as Agile Property and Shui On Land have issued perpetual bonds to improve cash flows. Analysts said such issues could distort the picture of their borrowings.

A perpetual bond is a debt issue that pays investors a higher coupon rate of interest but has no maturity date, and it may therefore be treated as equity, not debt, according to analysts.

Ng said developers' true debt levels could be higher if the perpetual bonds were taken into account.