A cash crunch in China’s real estate sector could leave well-funded developers as consolidators, providing a buying opportunity for investors betting on longer term growth in the mainland market.
As foreign funding for Chinese real estate dries up in the global financial crisis, developers who were once the darling of overseas investors have had to turn to their home market to meet their financial obligations.
A growing number are preparing various bond and rights offerings, as they seek funds to pay for their aggressive expansion of the last two years.
But many, especially weaker players, may have trouble raising funds from investors wary about a real estate bubble. And developers whose offerings fail could be forced to put themselves up for sale or face potential insolvency.
‘Smaller names with weaker funding assets, weaker execution capacity, weaker marketing capacity, they will be forced to pull out . . . . they may be acquired by someone else,’ says Michael Wu, a director from Fitch Ratings, which holds a negative outlook for the country’s residential property market in 2009.
Analysts say it is still too early to identify which firms may go into default or became acquisitions target.
But they are keeping a close eye on real estate companies’ capability to meet financial obligations in the next 12 months for clues.
‘Financing options available presently are onshore,’ said Christopher Lee, a director from Standard & Poor’s. ‘Large, listed developers continued to have better access compared with smaller, private companies.’
Reuters reports that as credit dries up and inventories build, developers have been slashing prices to speed up sales and boost their finances.
The trend led S&P to estimate that another 20% across-the-board cuts in prices would cause deep liquidity problems at many developers, speeding up consolidation.
China Vanke, the country’s biggest listed real estate developer, cut housing prices by 10-15% in 2008, and Citigroup expects house prices to fall a further 10-25% in 2009.
Moody’s Investors in January slashed Neo-China to its second lowest rating, considering it to be at or near default, saying the developer had missed a coupon payment.
‘We are likely to see more defaults and industry consolidation,’ said Bei Fu, a director from S & P.
Macquarie Research said China developers are entering the downcycle too highly geared. But firms such as China Resources Land and China Overseas Land are safer plays, it says.
Many developers are banking on the government’s recent calls to support the real estate sector as part of its broader drive to prop up the economy during the global economic slowdown.