Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

The squeeze is on.

A tightening of leverage, coupled with soaring land costs, looks set to end the home price windfall that China's developers have enjoyed this year.

Prices of new dwellings, excluding government-subsidized housing, gained in March in 62 of the 70 cities tracked by the government, compared with 56 in February, the National Bureau of Statistics said last month. On Monday, Longfor Properties Co. said contracted sales between January and April jumped 200 percent year-on-year to 60 billion yuan ($8.7 billion), while Credit Suisse Group AG noted that the 20 Hong Kong publicly traded Chinese real estate firms it tracks posted an 87 percent rise in first-quarter sales.

Sky High
Property prices in big cities like Shanghai and Beijing have been soaring
Source: Bloomberg, China Real Estate Information Corp.

There are several reasons why those sorts of figures can't last.

Property market curbs imposed by authorities are getting stricter, even in smaller, regional cities. Buying a second home is harder than ever: Down-payment rates are rising and the nation's banking regulator has instructed trust companies to rein in funding.

Mortgage rates are also increasing from record-low levels, as those banks not flush with deposits face higher funding costs following the People's Bank of China's recent round of short-term interest rate rises.

Transaction volumes are already being hit: Home sales in square-meter terms dropped by about 30 percent in the final week of April from the same period a year ago, according to data for 26 major cities tracked by research institute CREIS.

What's more, land prices are becoming exorbitant, limiting just how much real estate firms can add to their development banks. Even if companies do purchase more land, it's questionable how much of those higher costs can be passed on to home buyers.

According to Bloomberg Intelligence analyst Patrick Wong, China Jinmao Holdings Group Ltd. saw the cost of new land triple to an average 19,400 yuan per square meter in 2016 from 2015, while real estate expenses at Guangzhou-based KWG Property Holding Ltd. surged by 130 percent.

Risk On
Evergrande, Sunac and Guangzhou R&F have some of the highest net debt-to-equity levels among Chinese developers
Source: Bloomberg Intelligence

Replenishing land banks will hurt the profitability of some developers, particularly the highly indebted ones like China Evergrande Group and Guangzhou R&F Properties Co., both of which are counting on relisting in China as a way of tapping higher valuations.

Sunac China Holdings Ltd., which had total debt of $16.3 billion in fiscal 2016 and a market capitalization of $5.2 billion, is increasing its stake in Jinke Properties Group Co. most likely for that very purpose, announcing Tuesday that units will buy at least 20 million shares over the coming 12 months.

So while property curbs may not have had much of an impact in the past, this time it's different. You can already see it in the prices of Chinese property stocks in Hong Kong:

On the Turn
Despite buoyant first-quarter numbers, Chinese developer shares in Hong Kong are heading south
Source: Bloomberg

Investors be warned, this could be just the start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net