Weaker real estate developers in China could find it more difficult and expensive to borrow this year as strong companies look set to perform well. This will lead to a polarisation which could spur defaults and result in mergers between the smaller property companies, says Standard & Poor’s (S&P).
Interbank lending froze in June, leading to a credit crunch. The People’s Bank of China (PBoC)’s decision not to respond by pumping cash into the money markets shows the central bank’s determination to rein in China’s growing shadow banking sector, said Bei Fu, Hong Kong based credit analyst at S&P.
“China's new leadership appears intent on stamping out excessive credit growth, following pump-priming in the economy since 2009 and concerns about rising bad loans. The central government may take steps to reduce the availability of credit and increase funding costs for companies,” she said.
“Developers that have been shut out from other channels have frequently tapped these alternative funding sources, which include trust companies…The effects may start to be felt in the next six to 12 months.”
This, combined with the removal of the floor at which banks can lend, points to a changing credit environment in China. The second move will probably benefit big developers as rates on their bank loans could fall as competition among lenders grows. Smaller companies, on the other hand, may still have limited access to bank loans due to their vulnerability to economic cycles.
Sales performance is also likely to be split between the larger and smaller names. Large players such as China Vanke, Greenland Group, Poly Real Estate Group and China Overseas Land generated sales of around RMB60 billion in the first six months of the year, said Fu.
Other companies such as Sunac China Holdings, Country Garden Holdings and China Resources Land achieved more than 50% year-on-year growth in sales.
“On the other hand, small developers could still struggle to meet their full-year targets, such as Glorious Property Holdings, Mingfa Group (International) and Powerlong Real Estate Holdings. Small developers are vulnerable to shifting credit conditions and sensitive to increasing competition,” she said.
Credit conditions
There has been a suggestion that onshore equity markets may open up to developers. The markets have been closed off to the property sector since 2008. However, Fu is sceptical whether the timing is right to open this channel due to the fact the sector remains overheated despite regulatory efforts to stem growth.
Offshore bond issuance is likely to remain subdued for the remainder of this year as funding costs have risen over the past few months, she said. However, offshore bank loan markets have been particularly active recently.
“Several smaller developers obtained offshore bank facilities for the first time, including Sunac China, Greentown China Holdings, CIFI Holdings and Golden Wheel Tiandi Holdings. Repeat borrowers, such as Longfor Properties and Agile Property Holdings have been able to secure large loan facilities,” said Fu.
“We expect this trend to continue for other developers as Chinese banks become more active in the syndicated loan market in Hong Kong.”
On the whole, companies have had good access to funding over the past two to three quarters and have been able to refinance their fixed-term, high-cost trust loans and offshore obligations. As such, there is limited refinancing risk for the sector over the next six months to one year.
“Default rates are likely to remain low in the next six to 12 months. But Renhe Commercial Holdings is one rated developer that has a higher risk of defaulting over the next year because it may struggle to achieve sufficient sales to meet its financial obligations. Also, the company doesn't own land titles and therefore has limited disposable assets to help it stave off a liquidity crunch,” said Fu.
Tighter credit conditions for smaller companies means that industry consolidation is likely to increase over the next few years, she said. During the first six months of this year, the top 10 players comprised around 15% of the market. Fu expects this share to increase to 20% over the next three years.
“Differences between the costs and the availability of funding are likely to continue to widen between large and small developers as loan growth for the sector slows down from a high of 129% year-over-year in the first half of 2013,” she said.
“Weaker developers may look to mergers and acquisitions to provide liquidity support. For example, Greenland is buying SPG Land Holdings for that reason. Larger national players with increasingly better access to low-cost funding will have abundant acquisitions targets as smaller players struggle to adapt to a changing market. Industry polarisation and consolidation are clearly deepening.”