The funding crisis for mainland Chinese property developers is intensifying, ratings agencies say, with real-estate builders facing spiking borrowing costs and a limited ability to raise cash at a time when sales and economic growth are slowing.
With Beijing still talking tough on keeping property prices in check, 2012 is likely to be a crunch year in the industry.
Financially weak property developers "are likely to face a test of their survival this year," Standard & Poor's said in a report on Thursday.
Rival Moody's said more than one-third of the listed developers it tracks now have weak and declining liquidity, a much worse situation than at the end of last year, thanks to high levels of short-term debt and cash balances that are lower than expected.
A more dramatic decline in home prices and weaker property investment would pose significant risks for the world's second-largest economy, which is already facing a sharp slowdown in global demand for its exports. But if Beijing loosens its policy settings on property too quickly, it could lead to a revival in speculative activity and stoke inflation.
China's factories faltered in May, a private sector survey showed on Thursday, suggesting surprise weakness in April economic data persists and raising fears that the economy is cooling more rapidly than earlier expected.
SLOWING ECONOMY COMPOUNDING PROBLEMS
The data signal that the sluggish economic conditions of the first quarter are set to continue throughout the first half of the year, disappointing some economists' expectations that growth would pick up in May.
Both rating agencies highlighted Coastal Greenland , Greentown China Holdings and Hopson Development as having the most serious funding issues, which will likely require them to sell off property projects to meet their short-term debt.
A string of other developers are also seeing their finances worsen, the agencies said.
Simon Fung, the chief financial officer of Greentown China, said the ratings agencies have ignored his company's efforts to shed debt. With interest rates coming down, he does not feel this year marks a crisis for the industry or his company.
"We totally disagree with that, the toughest time was the end of last year," Fung said. "We solved our problem and are on a good track. But they just ignore it. Now I am very relaxed."
Greentown China has raised 6 billion yuan in cash by selling off six projects, including two to office and retail developer SoHo China. Those projects had another 6 billion yuan in debt, meaning there's been a 12 billion yuan ($1.9 billion) improvement in its liabilities.
Still, the company admits sales are poor, at 3 billion yuan per month, and its gearing ratio is too high at 120 percent, down from 148 percent last year.
"I openly admit we are negotiating with more buyers to sell more projects," Fung said. "We are planning to dispose of more assets to lower our gearing. But we don't have a survival problem."
The total debt maturing this year for the 29 rated developers tracked by Moody's is up 23 percent from the end of last year, to 159 billion yuan ($25.1 billion). Of those companies, 11 face serious funding constraints, up from only four at the end of 2011, the last time it did a stress test.
While financially strapped listed developers are selling off projects, state-owned enterprises such as China Overseas land & Investment and China Resources Land can tap bank loans, a cheap source of funding, and have the highest levels of cash to cover their short-term debt. They comfortably refinanced their maturing offshore debt this year, S&P said.
They could be the long-term beneficiaries of the property market's distress. COLI, China Resources, Agile Property and Longfor Properties have raised a combined HK$21 billion ($2.7 billion) in offshore loans in Hong Kong this year alone.
Developers without state backing have developed a dependence on expensive trust loans, private pools of money organised by banks and often backed by rich investors. Interest rates on trusts spiked above 20 percent at the end of last year, although they have fallen to around 13 percent in May, easing the most acute pressure.
Still, exposure to trusts and difficulties getting bank funding or raising money in the stock market do mean these are tough times for home builders in China. The situation is particularly acute with non-listed developers, according to a senior Hong Kong-based investment banker who raises funds for Chinese property companies.
"I think it's going to get worse not better," the banker said. He did not want to be identified because he is working on the sale of several distressed assets, deals that are not yet public.
"Most of the problems are because they took out real estate debt."
Such distressed sales are often completed under the radar, the banker said.
He is assisting one Chinese executive who runs two Hong Kong-listed public companies with the sale of private assets, so the executive can meet his debt obligations. In the murky world of Chinese accounting, it is not unusual for such private sales to end up funnelling cash into a public company.
Given the funding troubles at home, Chinese developers are seeking ever-more imaginative methods of raising cash, and are looking overseas, too.
The largest Chinese developer by sales, Shenzhen-listed China Vanke, in mid-May bought a majority stake Hong Kong company Winsor Properties Holdings for HK$1.1 billion. The buyout of Winsor, which owns only one mall in Hong Kong, effectively gives Vanke a back-door listing in Hong Kong that allows it to raise capital offshore.
Credit Suisse property analyst Jinsong Du said in a note that China Vanke is also looking to develop property in Hong Kong, while rival Country Garden is looking to offset the slowdown at home by pushing into Malaysian housing.
The Shanghai property subindex fell 0.5 on Thursday, while Hong Kong's property and construction index was up 0.2 percent. ($1 = 7.7652 Hong Kong dollars) ($1 = 6.3345 Chinese yuan)
