China property developers hoard cash
Mainland property companies are battening down the hatches while sitting on billions of dollars as they await fresh curbs on speculation
The mainland's biggest property developers are sitting on US$25 billion in cash as they prepare for a possible credit crunch and another round of crackdowns on real estate speculation.
Companies including Shimao Property Holdings and Greentown China Holdings raised more than US$16 billion in offshore bonds and loans over the first eight months of this year - about 36 per cent more than in all of last year. But they have turned more cautious about investing, leaving much of that money on their balance sheets.
The mainland's property sector is a pillar of growth in the world's second-biggest economy, accounting for 15 per cent of the gross domestic product in the first half of the year. Data released on Wednesday showed new home prices last month rose at the fastest pace in 21/2 years, strengthening the case for government cooling measures.
Reuters has analysed data on 76 Chinese property developers that reported results for the quarter to June 30, and found that while cash and short-term investments spiked, their spending plans were more conservative.
Thomson Reuters StarMine SmartEstimate data shows real estate management and development companies' total capital expenditures are expected to fall 11 per cent in the next 12 months, a sharp contrast with peers in the broader Asia-Pacific region where spending is forecast to rise 6.6 per cent.
Developers have curtailed capital spending as the US Federal Reserve's widely expected tapering of bond purchases - which has been postponed - drives up global interest rates.
At the same time, Beijing's renewed crackdown on the country's bubble-prone property market threatens to curb demand, while some cash-starved smaller developers could go bust, flooding the market with cheap property.
"The concern does exist for us. We solved our problems already and we are at a very stable situation, but other companies' problems will indirectly affect us - it's all interconnected.
"That's why we don't have a very aggressive plan for our sales target for the year."
Beijing has been trying for years to cool property prices, most recently by barring some in Zhengzhou, the capital of central Henan province, from buying second homes. Analysts expect similar rules in other cities too.
Evergrande and Greentown, two of the largest developers, reported jumps of more than 50 per cent in cash and cash equivalents in the first six months of the year, helped by strong sales and easy global credit markets.
Greentown said it had raised US$1.1 billion via offshore bond issues this year.
"We expanded our funding channels to overseas markets so that we won't be impacted by the domestic conditions as bad as before," Fung said.
With land prices hitting record highs and authorities renewing their push to rein in house prices, the developers' cash hoards may well prove crucial in a sector where margins are coming under pressure.
The sector's ebitda margins, a measure of profitability, are the lowest in six quarters as of the June period.
In the current year they are expected to rise only marginally to 21.5 per cent from 20.7 per cent in 2012, according to Thomson Reuters StarMine SmartEstimate data. In 2011, the average ebitda margin for the sector was 22.6 per cent.
"Developers are looking to be more flexible and liquid as a result of capital market, sector and local credit policy uncertainties. Banks will still be accommodative towards the big players, but at least developers recognise the importance of having buffers," said Raghav Bhandari, an analyst with CreditSights, an independent research firm.
Tse Wai-wah, chief financial officer at Evergrande, said the company's land acquisitions would slow the rest of the year, and predicted that smaller developers would feel the brunt of the tightening credit conditions.
"Liquidity has been tight since June," he said.
"Banks still need to do business and will lend but they will do so selectively. The impact [of tight credit] will be for small-scale developers."
Those smaller developers do not have the same access to overseas credit markets, leaving them reliant on less generous onshore funding.