China developers face cash crunch as coronavirus freezes home sales
SHANGHAI (BLOOMBERG) - China's debt-laden developers are facing a cash-crunch as the coronavirus outbreak brings the property market to its knees.
Most builders have a cash buffer of just three months, according to the China Real Estate Chamber of Commerce, one of the nation's largest developer associations. With lockdowns and travel restrictions entering their second month in some cities, the clock is starting to tick.
"The property market has ground to a halt everywhere, "said Zhang Dawei, a research director at Centaline Group in Beijing."If developers can't resume normal sales quickly, funding stress will emerge as a widespread issue in March."
The ramifications of a housing market in limbo are potentially huge. Not only does the property industry directly account for about 7 per cent of China's GDP, that climbs to about one-fifth of economic output once indirect contributions are added, and the flow-on effect could smash demand for building materials like steel and cement, as well as new appliances and furnishings, putting millions of jobs at risk.
"If the virus persists for two months and there's no policy support, property companies will face substantial business risks, "the Real Estate Chamber of Commerce said in a Feb 11 open letter calling for government action."If the sector is battered, it not only hurts economic development, but also leads to a wave of unemployment."
Developers were already under pressure before the worst of the virus hit. Home prices rose at the slowest pace in almost two years in January, data last week showed. The impact will be felt more fully in February, after developers were forced to shut showrooms as authorities sought to restrict large gatherings of people to stop the spread of the virus.
New apartment sales plummeted 97 per cent in the first week after the Lunar New Year holiday from a year earlier, according to China Real Estate Information Corp. Fewer than four units a day were sold in Beijing, whereas daily transactions would usually number about 400.
The sales drought has shut off a key source of cash-flow that developers need to service mountainous debts. Firms have the equivalent of about US$340 billion (S$476.7 billion) of yuan and US dollar bonds due by the end of 2021, according to data compiled by Bloomberg.
That's led some to take drastic steps to keep sales ticking over.
China Evergrande Group, whose net debt stood at US$88.5 billion as of June last year, is offering a discount of up to 25 per cent on many of its projects until the end of March. Buyers can secure an apartment with a downpayment of as little as 5, 000 yuan (S$994) and if prices fall further before early May, Evergrande will match the lower price.
The developer received deposits for more than 95, 080 homes in the first six days of the promotion. Evergrande assumes 70 per cent of the deals will lead to actual sales, with the total potential value of contracted transactions hitting about 60 billion yuan in just a few days.
Fantasia Holdings Group Co. has upped the ante even further, with a 'buy two apartments, get one free offer, ' and is taking deposits of as little as 1, 777 yuan. Not only that, if a buyer backs out within 30 days, they get their deposit back, plus interest.
In China, developers tend to use debt to fund land purchases and initial construction costs, then take proceeds from pre-sales to pay those debts and borrow more to start a new project, said Rosealea Yao, an analyst at Gavekal Dragonomics in Beijing.
The"sudden stop"of sales threatens that model, she said in a Feb 12 report."The key issue is that the huge loss of sales will squeeze developers' finances and could thus drag down construction activity even after the epidemic subsides, "she said.
Home price growth will slow to 2 per cent this year, said Yang Hongxu, a director at E-House China Enterprise Holdings Ltd's research institute. That would be the smallest increase since the 2008 financial crisis. Before the epidemic, he'd been forecasting 4 per cent growth.
Authorities have taken steps to help avert that situation.
Local authorities in Foshan and Chengdu have allowed showrooms to open as long as visitor numbers are minimized. Shanghai and Xi'an allowed fees for land purchases to be delayed. Suzhou and Wuxi went further, allowing developers to sell projects earlier than planned.
Meantime, the central government appears to have paused its push to deleverage developers. The People's Bank of China is said to be planning to underpin new-loan growth by softening its stance on property-related loan quotas, which may have the effect of spurring lending.
With property such a key part of the economy, the industry is seen as too big to fail. Revenue from land sales accounted for 40 per cent of total income for local governments last year, while almost 70 per cent of Chinese household wealth is tied up in real estate, a 2016 study by Chengdu's Southwestern University of Finance and Economics showed. That compares to about 35 per cent in the US.
"Real estate is still the final stabilizer of the economy, even if it's no longer the driver, "said Yang Kewei, a research director at China Real Estate Information Corp."As the virus clouds the economy, the government has to make developers survive."