Photo: Andrew Vanburen
Translated by Andrew Vanburen from a Chinese-language piece in Securities Daily
DINERS WITH BIG appetites sometimes end up saying their eyes are bigger than their stomachs when the check comes rolling around.
Others regret their gluttony after the fact, saying they bit off more than they could chew.
In similar fashion, the relentless campaign to boost land banks is beginning to take its toll on developers with too large an appetite.
So far this year, 22 of the top listed property firms have amassed some 400 billion yuan in debt, pushing their gearing ratios into dangerous territory.
First of all, the trend is disturbing, with the average debt to property asset ratio for the nearly two dozen developers rising to over 50%, with no signs of a slowdown in sight.
At least one real estate sector analyst has said that while allowable credit for new land bank accretions is tightening up for some developers, there is still a high tolerance for risk in the industry as real estate firms rush to gobble up plots and developments in order to cash in on an expected continuation of the historic urbanization story in China.
He said that it’s been a struggle for many of these highly leveraged firms to keep their heads above water, torn between the desire to keep up with the competition on the land bank front while minimizing gearing ratios to “manageable levels.”
This has left many industry players gasping for breath amid a stockpile of excess property assets and an even higher mountain of bank borrowings and other forms of financing.
The 22 A-share listed real estate enterprises surveyed have all reported their interim earnings already, and according to market research firm Hexin Flush Information Network (SZA: 300033) the nearly two dozen property developers have accumulated 398.5 billion yuan in debt, well over a 10% rise from the previous six-month period.
However, not everything is dire news these days for China’s listed property developers in the gearing department.
Another sector analyst said that the property financing climate is showing signs of improvement, with some of the more savvy and credit-worthy developers applying for development loans from lenders and often getting quick and full approval.
This has resulted in an overall growth in volume for property finance loans.
As for net gearing ratios?
The 22 interim reporting property developers have a current average net gearing ratio of 76%, up from 74.4% seen at the end of 2011.
Most market watchers are of the opinion that anything under 70% is a “healthy and sustainable” rate.
Therefore, with the average net gearing ratio above the level considered safe for the industry, and rumblings from Beijing of the likelihood of more macroeconomic measures targeting the property sector on the horizon, China’s listed developers will have a very memorable and challenging second half to say the least.
However, just released news that inflation in Mainland China decreased in July takes a bit of the pressure and focus off property developers for a while.
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