Chinese developers likely to ride out tougher financing environment in 2017

Chinese developers are unlikely to face a funding crisis in 2017 even as financing conditions get tougher, according to industry experts.

The good old days of developers enjoying easy access to funding is over. The yield on US dollar bonds is skyrocketing, while domestically the Shanghai Stock Exchange has suspended bond sales for property firms since October in a bid to cool the real estate bubble.

Nevertheless, homebuilders were unlikely to find themselves up against it in the next 12 months, said Christopher Yip, S&P Global Ratings’ senior director and analytical manager, who forecast things would get far tougher in the following two years.

“Developers’ refinancing risk is increasing, but not very substantially,” said Yip. “2017 is not going to be the worst. Developers will face a peak in offshore bonds due for repayment in 2018 and 2019.”

A reasonably friendly policy environment until Beijing rolled out a new round of tightening measures in October, including restrictions on bond sales, had helped support strong sales in the past year, leading to a much improved cash balance, Yip said.

The contracted sales of the top 10 Chinese developers in the first 11 months of this year have amounted to 200 billion yuan, according to data from China Real Estate Information Corp. That is already 34 per cent higher than the 149 billion yuan for the whole of 2015.

“We don’t have funding pressure,” said Kenny Chan, vice-president and company secretary of Shanghai-based Future Land Development Holdings.

The mid-sized, Hong Kong-listed developer saw sales during the 11 months jump 114 per cent to 60 billion yuan.

It currently had more than 15 billion yuan of cash on hand and about US$500 million in a bank credit line in Hong Kong, giving it flexibility in repaying its US$250 million in senior notes due in 2017 and redeeming US$350 million of notes next year, Chan said.

Karl Choi, head of greater China real estate research at Bank of America Merrill Lynch, said a lot of developers, especially the listed ones, took the first three quarters of this year as a window of opportunity to issue domestic bonds, and since the property market was so strong, “their cash flow is very good”.

But smaller players may not be so lucky, finding themselves hampered by tightened financing channels.

Analysts predict more market consolidation will take place in 2017.

The curbs on debt issuance have choked off a key source of funding for Chinese developers.

Due to their lower borrowing costs and the yuan’s depreciation, developers had turned to domestic bond issues since late 2014 and reduced their exposure to the offshore dollar bond market.

“The longer this window remains closed, the more it favours financially stronger players,” Choi said.

LVGEM (China) Real Estate Investment, a small developer in Shenzhen, said it believed domestic bond issuance was not fully closed off, but approvals had slowed and conditions had become more restrictive.

The firm said it had no financing needs in the short term and no plans to cut prices on its projects.

Still, an increase in funding costs is inevitable as bond yields continue to go up both in China and overseas, driven by rising global expectations of economic growth and inflation.

Yip said more property firms were likely to have their credit ratings downgraded in 2017 due to higher leverage.