Ratings agency S&P warns of risks from aggressive land banking by Chinese developers
- Mainland developers have been building up their land banks in line with the revival in the property market
- S&P warned of ‘elevating refinancing risks’ as bond repayments among developers come due
The rush by Chinese real estate developers to rebuild their land banks during the recent property revival could expose those with weaker capital positions to problems as bond repayments come due, S&P Global Ratings said in a research note on Wednesday.
The rating agency said it was most concerned about real estate companies with thin land reserves, as these groups have been active in building up reserves in step with the rising market since March.
“Given the strength of the market, developers will be tempted or even pushed to rebuild their land banks,” said S&P credit analyst Matthew Chow. “However, in a climate of snowballing maturities -amplified by prolific use of alternative financing – this could stretch groups’ liquidity, elevating refinancing risks.”
The upturn in the property market has been helped by relaxed price regulations and easing mortgage policies in second-tier cities.
April data showed that the average land-auction premium – the percentage paid over the opening price – rose to 28 per cent, up from 7 per cent in December, according to the China Index Academy, which monitors 300 mainland cities.
“We believe the situation may push developers to snap up land, eroding hard-won financial buffers built in the slower second half of 2018,” Chow said.
The rating agency said companies with the slimmest land reserves are among the lowest rated. It also cautioned that companies may face downgrades as they scramble to replenish their land banks.
The rating agency has a “negative” credit outlook for Yida China Holdings, a smaller company whose land could be depleted in less than a year if home sales exceed the company’s official target by 20 per cent. The rating agency has a “stable” outlook on China Vanke and CIFI Holdings. In comparison to other large developers, the land banks of these two companies are relatively low, with current reserves expected to be depleted within three years if their home sales exceed current targets by a fifth, according to S&P.
Zhang Hongwei, a research director with Shanghai-based Tospur consultancy, said smaller developers with thin land reserves are caught in a predicament.
“They are certainly under great pressure now. On one hand they don’t want to miss the current bull market, on the other hand bidding for land in regions such as those surrounding Shanghai, where everyone sees a promising future requires hefty funds,” he said. “But most of them are already leveraged, and the recent financing tightening, and declining stock prices, suggested caution.”
A number of developers that have been aggressive in land purchases have been denied access to China’s onshore bond market, local media reported this week. About 40 major developers monitored by Tospur raised 36.8 billion yuan (US$5.4 billion) through various means in May, reflecting a decline of 52.1 per cent from the capital raised in April.
The funding tightening could hamstring the ability of smaller developers to buy land, as indicated by a softening in the average land-auction premium during May to 23 per cent.
Liu Ce, head of research at Kaisa Group, said developers can find alternative financing sources by tapping the buoyant home presales market.
S&P warned that the land buying binge could prompt government to step up curbs, as developers might “find themselves in a familiar situation” having run up debt to fund aggressive expansion, only to see policies turn against them.
Joe Zhang, director of YX Distressed Asset Recovery, said mainland developers he met with recently had all been active in purchasing land.
“I must admit I see bubble and overbuild in the sector, but I fail to convince anyone. When the music is still playing, you’ve got to stand up and dance,” Zhang said.
