Mainland developers face mounting cash-flow challenges after achieving lower than expected revenue-generating property sales last month. Developers that are strapped for cash are now pinning their hopes for a boost to revenues on the traditional peak season in September, but analysts say that if stronger sales fail to materialise, the developers will face higher operational risk and lower profitability for the year. Credit risk, which had been aggravated by austerity measures such as a tightened lending policy, could affect developers in varying degrees, said UBS analyst Eric Wong. 'But in general, the smaller the property developer, the higher the credit risk,' he said. In a research report on the mainland property market released recently, Calyon Credit Agricole CIB said developers' credit risk would depend on their execution power to pre-sell and deliver their products. Their credit profiles would depend on the size of deposits from the sale of their properties, as against the amount of their guarantees to mortgaging banks. Under the property selling procedure on the mainland, a developer receives a deposit from a buyer when a sale and purchase arrangement has been signed, with the balance of the sale price subsequently provided by a mortgage bank. But the bank will require the developer to guarantee the mortgage over the construction period. When the property is completed and physically delivered to the buyer, the bank then unwinds the developer guarantee. 'As client deposits are a form of short-term working capital, increasing amounts would stem the liquidity risks faced by the developer and indicate that the company is indeed making presales,' Calyon Credit Agricole said. 'Unwound guarantees signify that a project has been completed to satisfaction and physically delivered, a testament to lower developer operational risk.' Of the five developers the French investment bank examined, Greentown China Holdings and China Overseas Land showed stable to decreasing guarantees for the last financial year, indicating projects were completed to satisfaction and delivered. Agile Property and Shimao Property showed a gradually rising trend, which might suggest problems down the road, the bank said. Mr Wong said that if developers had received 70 per cent of their targeted property revenues through presales this year, their earnings this year or next would be protected. Pressure would be greater if they only received 30 per cent. For example, Guangzhou's KWG Property Holdings achieved less than 30 per cent of its sales revenue target of 11 billion yuan (HK$12.37 billion) in the first five months of the year, he said. It has about 2.8 billion yuan in property sales to be booked this year.
