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
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.
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.