Leveraged China developers to benefit from PBOC's interest rate cuts

Analysts say mainland move to reduce lending costs expected to help firms with heavy borrowings and spark rise in home sales and prices

PUBLISHED : Thursday, 27 November, 2014, 5:01am
UPDATED : Thursday, 27 November, 2014, 5:01am

Property companies with high levels of onshore debt are expected to benefit from the interest rate cuts by the People's Bank of China last week.

David Hong, the head of research at China Real Estate Information Corp, estimates funding costs for companies will drop about 3 per cent if their outstanding debt is aligned with the central bank's new benchmark rate.

Analysts expect banks to start adjusting rates on outstanding loans from the beginning of next year.

Beijing on Friday cut the benchmark one-year lending rate by 40 basis points to 5.6 per cent and the one-year deposit rate by 25 basis points to 2.75 per cent. It also raised the ceiling for deposit rates to 20 per cent above the benchmark from 10 per cent.

The rate cut, the first in two-and-a-half years, was one of the strongest measures taken by the government to stem slowing growth and steady the faltering property market.

"Developers with a high level of onshore loans should benefit," said Lee Wee Liat, the head of property research at BNP Paribas.

China Vanke, the largest mainland developer by sales, stands to benefit the most, according to analysts. Others include Sunac China Holdings and KWG Property Holding.

Vanke has 86 per cent, or 70 billion yuan (HK$88.4 billion), of its borrowings denominated in yuan, according to CCB International, while Sunac's is 73 per cent, or 26 billion yuan. KWG's yuan debt amounts to 13 billion yuan, or 57 per cent of its debt.

Vanke shares have rallied 10.39 per cent to HK$15.3 since Friday. Sunac's stock has risen 16.34 per cent to HK$7.19 and KWG shares are up 13 per cent as investors expect a reversal of fortunes for developers following the rate cut.

Other companies expected by analysts to see a short-term rally include highly geared developers such as Guangzhou R&F Properties, Agile Property Holdings and Evergrande Real Estate Group.

Lee said that as more rate cuts were expected to revive the economy, the cost of funding for companies could drop substantially.

When that happened, he added, it would benefit more highly leveraged firms, turning some "ugly ducklings" into "swans".

Lee also said the rate cut heralded a possible reversal in the property sales slowdown.

He said in the previous two rate cuts, nationwide transaction volume and property prices rallied 60 per cent and 20 per cent, respectively.

In the wake of the dearth of credit to the property industry from mainland banks, Hong Kong rights offerings have jumped to a nine-year high as developers have been seeking to raise money from the city's stock market.

Deals proposed this week by underground shopping mall developer Renhe Commercial Holdings and investment company Mastermind Capital brought the number of planned rights offerings this year to 100, the most since at least 2005, according to data compiled by Bloomberg.

Hong Kong-listed companies have announced US$12.3 billion of such share sales this year, more than double the tally last year.

Mainland developers are seeking to raise cash after their average total debt-equity ratio rose to 125.9 per cent, from 117.7 per cent at the end of last year.

Separately, a wholly owned subsidiary of mainland developer Yango Group paid 2.11 billion yuan, or 41,078 yuan per buildable square metre, for a residential site in Shanghai yesterday. It is the most expensive piece of real estate sold in Shanghai in terms of unit buildable cost.