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05/11/2019 17:43

Funding crunch to curb expansion pace of developers in China

[ET Net News Agency, 5 November 2019] Chinese developers are shifting gears as they
embrace unprecedentedly tight financing conditions. Funding restrictions will dampen land
acquisition while some developers will expedite sales as internal cash generation becomes
ever more crucial as a source of funds, according to a report S&P Global Ratings published
today, titled " China Property Watch: Growth Confined By Funding Bind."
"Volumes rather than higher prices will likely lead the contracted sales trend for
China's residential market in 2020," said S&P's credit analyst Edward Chan. "We believe
sector players can continue to bump up volume through price deals and offering favorable
instalment payment, so long as promotions are not so excessive as to derail market
The credit rating agency forecast growth in residential sales will slow to 0%-5% over
2020. This is mainly held up by solid demand for properties in Chinese cities with better
Volume growth, a barometer for demand strength, has resumed in recent months. In the
first half of 2019, price increases almost wholly contributed to strong sales, however,
national cumulative residential sales volume growth has come back to the positive
territory since August.
China's regulators are scrutinizing financing channels for property developers like
never before. Restrictions or controls have hit offshore bond markets, trust financing,
and bank loans, on top of measures placed on domestic bonds since last year. The
government has also said that the property sector will not be used for short-term economic
stimulus, unlike past cycles.
Developers, especially more aggressive and less established ones, often rely on
alternative financing including trust loans, entrusted loans, and wealth management plans.
However, the recent clampdown means that new funding from these channels is essentially
Developers with large alternative financing in their capital structure are facing an
even tougher time in managing their refinancing risk, let alone expanding land banks.
Residential land sales for 300 cities grew 17% year-on-year by value in the third quarter
of 2019, down from 55% in the second quarter.
"Chinese developers will likely need to refocus on product differentiation, cost
management, and execution efficiency if they want to win or maintain market share," said
S&P's credit analyst Esther Liu. "They no longer have the firepower to compete purely on
scale expansion fueled by debt funding."
Many if not most developers have adopted a fast asset-turnover model as funds were
abundant in the past few years. They could buy land, swiftly get the project to a presale
standard, and then sales proceeds and project loans could fund the rest. This model helped
many to multiply their operating scale over a few short years. But with an effective
ceiling on new financing, the cycle is interrupted and only the larger players with still
good financing power can proceed with the substantial expansion.
Rated developers have issued more than US$65 billion worth of offshore bonds year to
date. This wave of fundraising has boosted liquidity and fueled further expansion.
However, maturity walls have been elevated to new heights, and risks are escalating for
weak developers with upcoming maturities but limited refinancing ability.
With restricted volumes, funding costs may become even more differentiated. For some
developers, offshore yields to maturity have surged well beyond the mid-teens, reflecting
low investor confidence. Even if default risks for this sector haven't heightened, poor
refinancing planning could create substantial event risks at a time when policies don't
offer a lot of room for slippage. (KL)

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