Growth model for Chinese developers 'is broken', BlackRock says

The mainland's longstanding model for property development, where companies buy up as much land as their balance sheets allow with the conviction that prices will only climb, is broken, BlackRock's regional head of real estate said yesterday.

The fund manager's John Saunders said that could leave the door open for foreign funds to swoop in to fill the demand for equity.

The growth model for many property developers on the mainland had been to gear up balance sheets and buy as much land as possible in the belief that land values would continue to rise, Saunders told a BlackRock forum in Hong Kong.

As land values increased, the ratio of debt to equity fell, allowing the developers to borrow more and buy more land. Pre-sales of developments generated cash flow that was used to pay debts.

But as land values and property prices dropped on the mainland, the level of debt on balance sheets had risen and cash flow waned.

"I think that model at the moment is broken," Saunders said. "With the loss of pre-sale consent and actually the loss of the ability to generate very quick cash flow from that, what you're left with is quite a levered system."

Despite increased policy easing from the central and the local governments, the mainland's housing market has yet to show signs of recovery, according to a report issued yesterday by Moody's Analytics.

Forty-one of the 46 cities that introduced home purchase restrictions have relaxed them, while the central government said on Monday that it would waive several fees and valuation charges for new and existing homes financed by its provident fund.

The People's Bank of China said yesterday it would lower its 14-day repurchase rate by another 10 basis points to 3.4 per cent, after a reduction of 30 basis points in August and September, the latest policy easing signal.

Housing prices fell in August in almost all major mainland cities. The amount of residential floor space sold in August declined 10 per cent year on year and new housing starts were down by 14 per cent, according to Moody's.

Land sales revenue in 300 mainland cities plunged by nearly half during the third quarter from the period last year, according to the China Index Academy.

The property sector has been weighed down by high inventories and tight credit. In some cities, such as Ningbo, developers say it will take two to three years to absorb the inventory of homes.

Increasingly high levels of debt at mainland developers should open opportunities for foreign investors to move into the market, Saunders said.

"In my 25-odd years here, China is now the most interesting I've seen it in pretty much the whole time," he said.

Rising numbers of shareholders in mainland developers would likely seek out foreign funds to boost equity, said Rob Blain, regional executive chairman of commercial property firm CBRE.

"Some of the Chinese stakeholders are looking towards strong foreign funds to raise capital by moving the stake in a quality asset," Blain said. "So we are seeing more of that as they are looking to raise some capital."