High debt, slow sales loom over Chinese property firms

All eyes are now on a few Chinese real estate developers particularly vulnerable to slow sales and tight credit, as mainland China’s property market enters a new downturn.

On the watch list are Hopson Development, Renhe Commercial, Glorious Property and Coastal Greenland, all suffering from either weak sales or high debt ratios, according to global ratings agencies. These companies are scheduled to announce annual results Thursday or Friday.

Glorious Property issued a profit warning last week, saying that lower gross profit margin, provision for impairment losses on some unsold units and smaller gains in the fair value of investment properties would result in “a significant decrease” in net profit for last year.

At the end of June, Glorious Property (36 per cent) and Hopson (42.8 per cent) had the lowest ratio of cash versus short-term debt among all mainland Chinese developers rated by Moody’s.

Adding to their cash strain is the extra caution being exercised by domestic banks when lending to developers after the collapse of a small private property firm in Ningbo and the first onshore debt default by a solar energy firm earlier this month that shattered the long-held belief that Beijing would always bail out struggling firms.

“In this environment, we believe financiers and investors will become more selective and favour borrowers with relatively strong credit quality, thereby further pressuring the liquidity of financially weak developers,” said Franco Leung, a property analyst at Moody’s Investors Service.

 Both Leung and Matthew Kong from Standard & Poor’s ruled out the possibility of any short-term systemic risk, while expecting bigger developers to become even stronger.

“The key lies in developers’ sales execution this year,” Kong said. “But bankruptcies are less likely, as they can opt to sell assets to peers and quit the market.”

Shou Bainian, chief executive of Greentown China, said on Monday: “If their assets are good, there is still hope (of survival).”

“But if their assets are not so good, neither is their reputation – then it will become more difficult.”

Greentown, a Hangzhou-based developer, is re-emerging stronger after approaching the brink in 2011. It survived by selling some projects to domestic peers and issuing new shares to Hong Kong developer Wharf Holdings.

This time around, Shou said Greentown stood ready to cut prices of some, but not all, projects to boost sales to protect cash flow, a flexible strategy adopted by many other mainland developers.

“The market is changing and maturing faster than expected,” said Wei Huaning, chief financial officer of Beijing-based Longfor Properties. “We need to stay calm and seek sustainable growth instead of following others to pursue (short-term) aggressive expansion.”