Faced with a worsening credit squeeze and a subsequent rise in funding costs, developers are expected to continue to unload properties at a fast pace to generate cash flow, according to analysts. Although the credit crunch's impact is negative on profitability, analysts said most developers would manage to wade through the difficulties. Lehman Brothers vice-president of equity research Michael Leary said the tight credit conditions had made developers more aggressive in pre-sales. It was cheaper, he said, to fund construction works through pre-sale proceeds than by borrowing from banks. Mr Leary said developers had sold more properties in the first four months of this year than in previous years and had generated significant cash flows, part of which was being used to cut debts. The increase in funding costs had been offset by the reduction in overall debts. He said most developers had managed their debts well and had a relatively low gearing of about 20 per cent to shareholders' equity. The most recent debt facility among developers is the $1.5 billion loan being arranged by Cheung Kong (Holdings) which was reportedly required to pay about twice the interest margin and fees than it did last year. Jardine Fleming Securities director Otto Wong estimated that 60 to 80 per cent of all Hong Kong-dollar debt for developers was in Hibor-linked instruments. Every 100-basis-point increase in interest rates would lead to a 3 to 8 per cent decline in developers' net profits over a full 12 months, he said. Developers, faced with higher holding and funding costs in the tightened credit market, would have to be aggressive in pre-sales to generate cash flow, he said. Smaller developers that had higher debt to equity ratios would be harder hit. He said the credit squeeze would not force them into insolvency but they would experience a longer period of consolidation. Mr Leary said there was increasing pressure on the Government to change the 15-month pre-sale restrictions that limit developers' ability to speed up cash returns. He said about 60 per cent or more of property development costs were in land and the measures requiring developers to start pre-sales within 15 months ahead of a project's completion were too harsh, especially in today's credit environment. The Government, he said, should consider scrapping other pre-sale measures such as the restriction on offering all flats for sale within six months and the ban on re-sale of properties before completion.