Developers facing financing woes in China, warns S&P

A slowdown in sales growth and unabated land acquisitions will put some mainland developers in danger this year as financing gets tighter, global ratings agencies warned this week.

Standard & Poor's expected 5 per cent growth in average sales price and a 10 per cent rise in sales volume for mainland developers this year, down from an increase of 8 per cent and 18 per cent respectively last year, as a weaker economy, local government property tightening measures and an uncertain financing environment take their toll.

"Listed Chinese developers may face a contraction in funding channels and higher funding cost," S&P said in its first of a quarterly series on Chinese property developers.

Mainland developers had reported record contracted sales, got into offshore fundraising and went on a land-buying spree in top-tier cities such as Beijing and Shanghai despite soaring land prices, leading to a rise in leverage in the next 12 months for some developers, it said.

As a result, S&P's ratings on these developers "may face downward pressure as their debt increases may have outpaced property sales growth. Nonetheless, we believe the ratings in the sector will largely remain stable", it said.

Among outstanding bonds due this year, Powerlong Real Estate and Country Garden should be able to either refinance or use cash to pay off debts, but the refinancing of China Properties could face higher uncertainty, although the developer's good asset quality and the controlling shareholder's track record in providing support would alleviate default risk, S&P said.

This followed a report by Moody's which said a default in China's trust loan market would tighten the availability of trust loans as a funding source to Chinese property developers, singling out Hopson Development Holdings, Coastal Greenland and Glorious Property Holdings.

Shanghai Chaori Solar Energy Science & Technology became the first onshore corporate bond default on the mainland when it failed to make an interest payment yesterday on a five-year one billion yuan (HK$1.27 billion) bond issued two years ago.

Trust loans account for only about 4 per cent of rated Chinese corporates' outstanding debt, but about 61 per cent of the rated property developers have trust loans on their balance sheets, representing about 12 per cent of their approximately 1.3 billion yuan in debt at the end of 2013, Moody's said.

"Over the longer term, if the trust loan market remained closed to property developers, it would reduce funding channels for land acquisitions and other needs," it added.

On the policy front, S&P said China would likely continue experimenting with market-based measures such as property taxes and increasing the housing supply to control overheating in selective markets in 2014.

Premier Li Keqiang made little direct comment on property policy in his first government report on Wednesday, but he reaffirmed that China would step up efforts to increase the supply of state-subsidised homes and widen financing options to support such schemes.