China’s Property Slump Leads to Record Loans to BuildersChristopher Langner
Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005.
Homebuilders in the world’s second-largest economy got $5.9 billion from foreign banks, up 39 percent from the same period last year, according to data compiled by Bloomberg. Builder debt has soared to 128 percent of equity, the highest since 2005, according to a Bloomberg Intelligence gauge of 84 companies. New home prices fell in July in almost all cities the government tracks and developers are missing sales targets.
“Higher leverage on the balance sheet will give developers a higher financial burden,” said Agnes Wong, credit strategist at Nomura Holdings Inc. in Hong Kong. “That means that if presales are not going as quick as they expect it can translate into trouble more easily than before.”
Premier Li Keqiang is allowing builders to expand financing channels in a bid to stem the slowdown in an economy that derived 16 percent of its growth from property development last year, according to the World Bank. Sino-Ocean Land Holdings Ltd., whose free cash flow in 2013 dropped to a third of the previous year, led the borrowing with an $800 million loan.
China’s home sales fell 10.5 percent in the first seven months of the year compared to the same period in 2013 to 3 trillion yuan ($488 billion), Moody’s Investors Service said in an Aug. 29 report. New construction declined 20 percent across the country, according to an Aug. 7 report from Fitch Ratings.
Central China Real Estate Ltd., Poly Property Group Co. and Yuexiu Property Co. Ltd. were among companies taking loans offshore this year.
Pressure on real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co. Developers including China Vanke Co., the nation’s biggest, and Greentown China Holdings Ltd., the largest in the eastern province of Zhejiang, have cut prices since then to boost sales.
The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg. The Purchasing Managers’ Index, a gauge of manufacturing, fell to 51.1 for August from 51.7 in July, data today showed. The yuan has fallen 1.4 percent against the dollar this year, making it the worst-performing major Asian currency.
Standard & Poor’s has reduced ratings for six Chinese property companies and increased them for two this year. That compares with two upgrades and two downgrades in 2013, according to Bloomberg-compiled data.
The three-year facility by the Beijing-based Sino-Ocean Land, whose projects include the Ocean Landscape residential development in the capital, pays a fixed 3.1 percent coupon. That compares with the 4.5 percent yield on the company’s 2019 dollar bonds, according to prices compiled by Bloomberg.
Lenders in Asia are extending more credit to high-yield companies as they seek to increase returns as central banks in the U.S., Europe and Japan keep benchmark interest rates near zero.
“Banks often will understand the credit better and will be able to get ancillary business from the same company so they can price a little bit cheaper,” Hong Kong-based Sonia Li, head of syndicated loans of JPMorgan Chase & Co. in Asia, said in a phone interview on Aug. 19.
Cheaper borrowing from global banks that until five years ago didn’t lend to high-yield developers from China is a positive development, Owen Gallimore, the Singapore-based credit strategist at Australia & New Zealand Banking Co., said in a phone interview on Aug. 20.
Chinese real estate companies have increased dollar-denominated bond issuance to $16.5 billion this year, up 38 percent from the same period in 2013, Bloomberg-compiled data show.
“Funding and liquidity have also been boosted this year by the strong offshore bond primary market, syndicated loans, and regulatory re-opening of the onshore bond market,” Gallimore said. “Defaults are therefore not likely to spike.”
Property sales may improve for the remainder of 2014, helped by a rise in mortgage lending and selective loosening of purchases restrictions, Moody’s said in its Aug. 29 report.
The rise in loan funding is cause for concern because it reduces the claims that global bond investors have on the assets of Chinese developers, Nomura’s Wong said. The trend comes just as companies issue more expensive debt in the local market, expanding their overall liabilities, she added.
The overseas borrowing also adds to debtloads exacerbated by increased issuance of securities that have no set maturity dates. Chinese companies are selling a record number of the so-called perpetual notes that can be booked as equity this year, sidestepping government efforts to reduce the world’s biggest corporate borrowings.
That may drive up developers’ financing costs in part because the securities “generally start with a base dividend rate of about 8 percent per annum,” according to an Aug. 29 report by Robert Hing Fong, an analyst in the China team of Bloomberg Intelligence. Agile Property Holdings Ltd., which borrowed $520 million from foreign banks this year, had 4.48 billion yuan of the notes as of June, according to the report.
Chinese property companies may need to raise funds to cushion against any worse-than-expected sales slumps this half, Du Jinsong, an analyst at Credit Suisse Group AG, said in an interview Aug. 28.
The latest sign of demand for fresh funds in the industry came last week when Country Garden Holdings Co., controlled by China’s richest woman Yang Huiyan, announced plans for a share sale. The developer plans to raise HK$3.18 billion ($410 million) in a discounted share sale to refinance debt, including notes maturing in September, according to an Aug. 27 filing.
“On one hand it is definitely good that they are still able to get bank money,” Wong at Nomura said about Chinese builders in general. “But on the other hand they now have higher debt sitting on the balance sheet.”