Chinese property developers are facing a double whammy of worsening credit quality and slower sales growth as, despite the trade spat with the US, regulators maintain their cooling measures.
After Hong Kong-listed Chinese homebuilders published their mid-year results last month, FinanceAsia finds that nearly all of them reported higher net gearing ratios compared to the beginning of the year.
Sunac China, the country’s most indebted property developer, said that its net debt-to-equity ratio rose 45 percentage points to 262% as of the end of June. Guangzhou R&F Properties was close behind with a net gearing ratio of 241%, up 36 percentage points from the beginning of the year.
Developers which typically sat on low debt have also begun to see their borrowings pile up as they find it harder to refinance.
Vanke, the largest mainland developer by sales last year, said that its net gearing ratio rose to 50% in June from 36% at the start of the year. The Shenzhen-headquartered company was one of the developers with the lowest debt after selling $1 billion worth of shares in March.
All of the developers which have already reported their mid-year results have a net gearing ratio above 50%, which is typically seen as an indicator that the company is highly leveraged.
SLOWER SALES
At the same time, some property developers experienced a slowdown in property sales after the government tightened regulations on home purchases and capped prices on some of them.
Sunac China said that its earnings for the first six months was about $1.5 billion, which represents an increase of 36% compared to $961 million in the first half of 2018. That growth rate, however, was nowhere near the 297% growth last year.
It was a similar case for Guangzhou R&F. The Guangdong-based developer reported only a slight 2% rise in net profits in the first half compared to a 69% increase last year.
China Evergrande, one of the country’s top home sellers, even reported a 45% decline in first-half profits compared to the same period last year. The company’s revenues of Rmb282 billion accounted for less than half of its Rmb600 billion full-year sales target.
HEADWINDS
Mainland developers are finding it hard to refinance their debt as their cash flow slows on the back of weaker home sales. It is also more difficult for them to secure funding from banks now that the China Banking and Insurance Regulatory Commission has asked financial institutions to tighten lending to risky developers.
Developers sitting on US dollar debt are likely to be hit harder as the Chinese currency continues to weaken against the greenback. In August alone, the Renminbi dropped 4% against the US dollar.
The move was widely seen as a deliberate move by Beijing to keep its goods competitive as the trade spat with the US intensifies, although the Chinese government has denied claims that it is a currency manipulator.
Should the Renminbi continue to depreciate against the US dollar, Chinese developers like Sunac and Evergrande will have a tough time repaying their outstanding US dollar loans because their revenues – nearly all denominated in Renminbi – will be worth less against their foreign currency debt.
Evergrande, a frequent issuer of US dollar bonds, is currently sitting on about $18 billion of US dollar loans. Sunac has about $6 billion.
China’s housing sector is bracing itself for a prolonged slowdown at least towards the end of the year after the government in July ruled out plans to stimulate the property sector in order to drive economic growth.
Senior officials reiterated that the government sees housing as a basic necessity and will strive to maintain the stability of the property sector. The comments were made at the July 30 meeting of the Political Bureau of the Communist Party of China Central Committee, the top decision-making body of the country’s ruling party.
