Small Chinese property developers betting on 'revenge spending' could go bankrupt instead

By Pearl Liu pearl.liu@scmp.com

/ https://www.scmp.com/business/investor-relations/article/3090301/small-chinese-property-developers-betting-revenge?utm_medium=partner&utm_campaign=contentexchange&utm_source=EdgeProp&utm_content=3090301 |

June 30, 2020 4:45 PM SGT

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Shanghai-based Zhenro Properties plans to build up its land bank this year by acquiring plots during distress sales by smaller companies.

The top-tier developer believes underperforming smaller property companies will be forced to offload projects in the second half of the year, with some filing for bankruptcy, and will not buy all its land at expensive government auctions.

"About 20 per cent to 30 per cent of home builders will be gone [in the next couple of years]. Some will just exit the market, while others will go bust," Kenny Chan, Zhenro's chief financial officer, said. "This will be a good year for mergers and acquisitions " both at company level and at project level."

About 230 property developers have already gone out of business this year, according to state-owned publication People's Court Daily, an increase of 10 per cent over last year. More are expected to follow as smaller developers are wrongly betting on a recovery in mainland China's housing market, observers said.

"The risk of going bust is huge in the second half, as small developers are gambling. They have actively been buying land at high prices these past two months, betting on the market staying hot. If the market turns sour in the coming months, they will face a liquidity crunch and the worst scenario for them will be bankruptcy," said Leif Chang, head of China property research at Nomura.

These companies have gone on a land buying binge since April. Land worth 360 billion yuan (US$50.9 billion) was sold in 100 major mainland Chinese cities last month, doubling the amount recorded in February and about 8 per cent higher than last year, according to Chinese data provider Wind.

"The top developers have been quite cautious and have tightened their purse strings, while smaller ones are rushing to scale up," Chang said.

The smaller developers are hoping that "revenge spending" on property, which first emerged in late March after coronavirus lockdowns were lifted across the country, will persist. Last month, tier 1 and tier 2 cities recorded a 19 per cent monthly increase in home sales, with 23 million square metres of property sold, according to China Real Estate Information Corporation (CRIC). This followed a 43 per cent rise in April and 303 per cent jump in March.

Shenzhen in home buying frenzy as police disperse 3,000 people at project launch

Market observers, however, said this rebound could prove to be fragile and short-lived, especially as mainland China experiences its worst economic slowdown on record.

"It is a huge question mark " whether the rebound in sales can continue in the second half? After all, ordinary people's eagerness to purchase homes will be damaged if they foresee lower income, or even being out of work," said Lung Siu Fung, analyst with CCB International Securities. "If that happens, more small developers will find it difficult to stay afloat with their land payments and existing debt."

Other analysts said there was a very big chance the market will soften as soon as supply rises, which will lead to a price war and unsold homes piling up. According to Nomura, the supply of new homes among major developers is expected to be 36 per cent higher in the second half when compared with last year.

Rating agencies Moody's Investors Service downgraded the outlook for China's property sector to negative in April, and along with S&P Global Ratings expected nationwide sales to fall by 5 per cent to 10 per cent in 2020.

At the same time, developers, particularly small ones, have found it difficult to raise new money, despite the fact that financing rules have been relaxed by the government.

"Onshore bonds are easier to get, but are only for refinancing existing debt. Construction loans from banks are easier and cheaper, but are only available when they have projects in hand. However, you need money to buy land for new projects. Where will they get that?" said CCB's Lung. "That is why we are seeing more small-cap " and even mini-cap " developers queuing up to go public. They really need the money."

China Vanke seeks a second US$1 billion from stock placement to repay debt

At least 11 mainland Chinese developers, most with less than 10 billion yuan a year in sales, and seven management service providers spun off from bigger developers, had filed or were planning to file for initial public offerings in Hong Kong as of this month.

Moreover, some Chinese developers might be worse off. They might have hidden debt in joint ventures with higher rated financial institutions or individual borrowers, S&P said.

"It is hard to track how many developers are using this format to borrow money, which cannot be seen on balance sheets, but we see the risk here. We see more joint ventures have been formed by developers. Some are for good purposes, for example, getting land at a better rate. But some are eyeing loans," said Christopher Yip, analyst at S&P.

Shenzhen tries to aid property firms, drives up prices of homes instead

The ratings agency said 20 per cent of joint ventures in China are now formed between developers and non developers, who could be higher rated borrowers.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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