Growth model for Chinese developers 'is broken', BlackRock says
Opportunities may open up for foreign funds to enter the market as mainland players sit on huge debt piles, says BlackRock executive
The mainland's longstanding model for property development, where companies buy up as much land as their balance sheets allow with the conviction that prices will only climb, is broken, BlackRock's regional head of real estate said yesterday.
The fund manager's John Saunders said that could leave the door open for foreign funds to swoop in to fill the demand for equity.
The growth model for many property developers on the mainland had been to gear up balance sheets and buy as much land as possible in the belief that land values would continue to rise, Saunders told a BlackRock forum in Hong Kong.
As land values increased, the ratio of debt to equity fell, allowing the developers to borrow more and buy more land. Pre-sales of developments generated cash flow that was used to pay debts.
But as land values and property prices dropped on the mainland, the level of debt on balance sheets had risen and cash flow waned.
"I think that model at the moment is broken," Saunders said. "With the loss of pre-sale consent and actually the loss of the ability to generate very quick cash flow from that, what you're left with is quite a levered system."
Despite increased policy easing from the central and the local governments, the mainland's housing market has yet to show signs of recovery, according to a report issued yesterday by Moody's Analytics.