Chinese Property Developers 'Hoarding' Cash

Chinese Property Developers 'Hoarding' Cash

Commercial News » Asia Pacific Commercial News Edition | By Francys Vallecillo | September 20, 2013 12:28 PM ET

Chinese property developers have more than $25 billion in cash on their books, but they are reluctant to spend money until uncertainties in the markets are resolved, according to a new report.

In the first eight months of 2013, China's real estate management and development companies, including such major players as Shimao Property Holdings and Greentown China Holdings, raised more than $16 billion from offshore bonds and loans, approximately 36 percent more than in the 12 months in 2012, according to Reuters, which studied data from 76 Chinese property companies.

Developers are cautious amid concerns of rising interest rates and the potential for more government measures to dampen the real estate market, the wire service reports.

"Our financial situation is quite healthy, but we do have concerns for a credit crunch in the industry," Fung Ching Simon, Greentown China Holdings chief financial officer, told Reuters. "We solved our problems already and we are at a very stable situation, but other companies' problems will indirectly affect us -- it's all interconnected." 

Two of China's biggest developers, Evergrande and Greentown, reported an increase of more than 50 percent in cash and cash equivalents during the first half of the year, boosted by strong sales overseas, Reuters reports.

"We expanded our funding channels to overseas markets so that we won't be impacted by the domestic conditions as bad as before," Mr. Fung said.

China's real estate companies' total expenditures are expected to fall 11 percent in the next year, compared to the broader Asia-Pacific region where it is expected to increase 6.6 percent, according to the Reuters report. 

Tightening credit conditions could have an effect on land acquisitions by property companies, Tse Wai Wah, chief financial officer at Evergrande, told Reuters.

"Liquidity has been tight since June," Mr. Wah said. "Banks still need to do business and will lend but they will do so selectively. The impact (of tight credit) will be for small-scale developers."

The wealth of capital could also lead to a new round of buyouts. There were $14.9 billion in mergers and acquisitions announced this year, already topping 2012's entire tally of $14.7 billion, according to Thomson Reuters data.

"We could see smaller local guys tempted to sell out to big national guys or Hong Kong players," Guy Stear, analyst with Societe Generale in Hong Kong, told Reuters. "We will see more consolidation in the Chinese property sector, like we did in the banking sector. It is far too fragmented."

EBITDA margins for the sector, a measure of profitability, was the lowest in six quarters as of June and it is expected to increase only slighty for the year, to 21.5 percent this year from 20.7 percent in 2012, according to Thomson Reuters StarMine SmartEstimate data.

"Developers are looking to be more flexible and liquid as a result of capital market, sector and local credit policy uncertainties," said Raghav Bhandari, an analyst with CreditSights, an independent research firm. "Banks will still be accommodative towards the big players, but at least developers recognize the importance of having buffers."

Developers have shied away from capital spending as property demand is threatened in Beijing and other major cities, while the government looks to enforce measures aimed at cooling the market.

Despite the measures, China home prices have continued to rise, leading to speculation that more restrictions may be imposed on home buying.

Concerns were raised from the U.S. Federal Reserve's possible tapering of bond purchases, which could send global interest rates were expected to increase. But interest rates in the U.S. held steady after the Federal Reserve this week announced it will not reduce bond purchases.

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