[photopress:real_estate_squeeze.jpg,full,alignright]The Chinese government has tightened financial controls on property developers. Basically it means that unless a developer has unlimited access to funds or a very, very strong arrangement with a bank, then it is going to be very difficult to finance developments.
Other moves which do not make a developer’s lot a happy one is delaying the approval process for listing on the domestic stock markets and slowing down permissions from China’s foreign exchange authority for transfer of funds from overseas financing channels.
There are also curbs at the consumer end so that it is difficult to arrange mortgages for second-home buyers and the banks are closely scrutinizing the sources of financing developers favor for rapid expansion into new projects: basically loans to potential home buyers to make so-called pre-sale purchases which is buying a flat before it is even built.
Many of them, such as industry leader Country Garden Holdings, are turning to alternative avenues such as convertible bond financing, despite the high cost of funds, as liquidity from traditional banking sources, plain-vanilla bonds and equities disappears.
The looming financial crisis prompted Standard and Poor’s to warn of ‘a bruising year’ ahead for many Chinese real estate developers.
The ratings agency said, ‘Liquidity, seemingly available to all developers just 12 months back, could dry up if market conditions do not improve, making it difficulty for some players to maintain their growth momentum and dealing a crippling blow to others.’
According to Standard & Poor’s only one Chinese real estate developer, China Overseas Land & Investment, achieves an above-average rating in terms of both its business risk and financial risk. Country Garden registers as above-average on financial risk but only average on its business risk profile. Three other major companies — Shimao Property, Agile Property and Hopson Development post average scores on their S&P financial and business risk profiles.
All five companies, however, are relatively stronger than their domestic rivals because their status as listed companies in Hong Kong allows them to tap financing from overseas capital markets.
But even so, they could be faced with a tough job negotiating China’s tight capital control regime in the effort to funnel offshore funds into their operations at home.