Beijing's credit easing gives hope to cash-strapped property developers
For cash-strapped developers on the mainland, credit-relaxation measures announced by Beijing offer the prospect of an easing of mounting liquidity risk as the property market downturn deepens.
Of the 14 major mainland developers monitored by Mizuho Securities, only four - China Resources Land, Sino Ocean Land, KWG and China Vanke - have managed to maintain positive operating cash flows, with only Vanke doing so consistently since 2008.
The People's Bank of China and the China Banking Regulatory Commission last Tuesday announced the first easing of housing policies since 2010. They redefined first-time buyers and lowered the preferential mortgage rate for them. Those who have fully repaid an outstanding mortgage loan will be considered first-time home buyers, the central bank and CBRC said in their joint statement. Thus, they only need to come up with 30 per cent deposit, instead of 60 per cent.
Analysts have described the loosened mortgage rules as significant, but caution the impact will take time to flow through to the market.
The stakes are high for developers, which have been unable to boost sales through price cuts - despite the peak autumn sales season under way - and have seen the shadow banking sector become less supportive.
The scale of the challenges facing mainland property firms was highlighted by data on Thursday that showed home prices fell for a fifth consecutive month in 100 big cities. The average new home price dropped to 10,672 yuan (HK$13,484) per square metre in September, down 0.92 per cent from August, and off 0.59 per cent from the previous month, data provider China Index Academy said.
The extended slide in prices is set to further stoke concerns over developers' liquidity risks, especially as they failed to gain a lift from the traditionally strong buying season.
The 14 developers tracked by Mizuho had an average operating cash flow of minus 7.52 billion yuan in the 2013 financial year, against a positive cash flow of HK$2.87 billion in 2012.
"On a year-on-year basis, the liquidity of developers may be even tighter in the second half than the first half," said Alan Jin, property analyst for Asia ex-Japan at Mizuho Securities Asia. "Mortgage loan relaxation, especially a reduction in the down-payment requirement, is pretty significant.
"It will help property sales and hence ease developers' financial risk to some extent. But it may take some time for the full impact to be felt by the market."
As part of the easing measures, the regulators said those meeting the definition of first-time buyers could receive a preferential interest rate as low as 30 per cent below the benchmark rate, instead of the previous 15 per cent discount.
"It is the first time we have seen an easing on housing policies from the central government since 2010 and targeting the credit issue," Jin said. "Its impact should be reflected in the sales of mass-market homes and upmarket properties in the upcoming months."
Before the credit easing, analysts raised concerns that developers' could come under increasing liquidity pressure since price cuts alone have failed to bolster sales.
Total sales by floor area in the first eight months of this year fell 8.3 per cent year on year to 650 million square metres, the China Real Estate Information Corp said. Total sales revenues fell 8.9 per cent year on year to four trillion yuan in the period. Moreover, sales did not recovery significantly in the 41 cities that have removed buying restrictions over recent months.
In another consequence of the property market slump, developers are getting less support from the shadow banking sector, a report by investment bank Jefferies said last week.
The issuance of collective trust loan products related to property dropped 33 per cent month on month and 62 per cent year on year to 16 billion yuan in August, hitting lows not seen since February 2012, Jefferies quoted mainland trust website Yanglee as saying.
In September, the amount issued shrank 57 per cent month on month to seven billion yuan by September 23, mainly due to rising concerns over developers' liquidity risk, even as assessed by trust loan lenders.
Jefferies is concerned that Evergrande Real Estate and Guangzhou R&F's financing capacity would be affected significantly, as the funding raised through trust loan companies accounted for 61 per cent and 41 per cent of their total debt, respectively.
In Tuesday's announcement, the banks were encouraged to support developers "reasonable" funding demands and enrich market-oriented funding channels for developers by helping them to issue interbank debt securities. It also encouraged banks to issue mortgage-backed securities and bonds with long tenor, with the proceeds to be used exclusively for mortgage loans for first-home buyers and home upgraders.