Developers Short of Money

With the intensive government regulation and control targeted at the capital chain of the property developers, the waning trading volume nearly cut off the source of income of the property developers. How long can they prop up themselves?

The once overheated property market in China cooled down rapidly in May due to intensive government regulation and control. The trading volume of real estate has dropped to the lowest point. The capital chain of the property developers suddenly became strained.

Guangzhou-based EverGrande Group took the lead in providing a 15% discount in the price of all its housing buildings on May 5. Xue Jianxiong, a property analyst from E-House (China) Holdings Ltd, said: “The property developers who underwent the fast expansion last year may reduce their house prices at this moment. The developers, like GreenTown Group, LongFor Property and China Merchants Property which previously expanded their businesses too fast, had problems with capital chains with the eased sales.”

“We Do Lack Money”

A source knowing EverGrande Group well said that the company presently is not under capital stress. The 15% discount is not a simple sales promotion activity; instead, it has the strategic purpose to accelerate the industrial conformity by acquiring small-sized developers.

On May 9, EverGrande reached an agreement with its 200 suppliers in the inherent conformity of the industry chain. “Our boss’s motto is that we don’t earn money from the house buyers but from the suppliers and decorators,” said the source.

EverGrande’s data displays the optimistic status quo of this company. From January to April, EverGrande saw the total sales of 12.31 billion yuan (USD 1.80 billion), up 120.3% like for like. By April 30, EverGrande’s cash balance was 20.99 billion HK dollars.

Pan Shiqi, board chairman of SOHO China, said that the property developers will not lose the game very quickly. Actually, 70% of listed property companies have the cash flow of more than 10 billion yuan (USD 1.46 billion), which could support their operation for three years. Ren Zhiqiang, board chairman of Huayuan Property, said that the developers could survive for one year without any earnings.

An analyst said that the listed property companies in China are blessed by the best capital conditions in these years. Therefore, the government control and decreased trading volume will have tiny effect upon them. They can survive this tough period.

This March, 86 listed property companies published their 2009 financial reports. Their net profits totaled 34.715 billion yuan (USD 5.08 billion). 19 of them witnessed 100% like-for-like sales. The ten major companies held 121.7 billion yuan (USD 17.8 billion) till the end of 2009, much higher than a year before.

However, behind these exciting data are the huge liabilities. According to the statistical data, the total amount of liabilities of the ten major property companies reaches 420 billion yuan (USD 61.51 billion). A year ago these companies could cheer for their net profits of 26.5 billion yuan (USD 3.8 billion). That means they have spent 15 years paying off their debts if they can maintain their net profits at the level of 2009.

The asset-liability ratio is another important figure to show the developers’ capital condition. The four largest property developers in China were haunted by the asset-liability ratio of more than 60%.

In addition, these developers’ financial reports in Q1 this year showed that their capital conditions made a U-turn. The Chinese largest property developer Wanke Group, for example, saw the like-for-like net cash flow decrease by 284.56% to 6.8 billion yuan (USD 995.9 million).

Pre-sale fund to Be Monitored

It is known that the Ministry of Housing and Urban-Rural Development is working with the People’s Bank of China and the other departments to monitor the pre-sale funds of the property companies’ projects under sale. Pan Shiqi, board chairman of SOHO China, if this policy is implemented, great influence will be exerted upon the developers’ cash flow.

The pre-sale funds are the preemptive capital of the property developers, who have been making full use of them for long. However, the monitor on this object will tightly bind the property developers in using capital. The government’s intension is obvious – to add great stress onto the developers’ capital chain, pouring cold water on the overheated property market.

The new measures, said an analyst, set stipulations over the purpose and time of using pre-sale funds. “On the one hand, the pre-sale funds used as capital for development and engineering should be exclusive; on the other hand, they can only be used when the project is completed and settled.”

The pre-sale funds including the down payments of house buyers, and the bank mortgage loans, are the most important capital sources for the property developers. Among them, the down payments are delivered before the start of the project. The mortgage loans are lent by the banks when the project is nearly finished. Presently, the maneuver of these capital is at the property developers’ will.

According to the source, the pre-sale funds take a significant proportion in the total investment. Though disparity exists in different projects, the proportion fluctuates around 30%. “There are flexible ways of using pre-sale funds, most of which are used to buy lands,” said a source. But this will be ended in the coming future.

“The pre-sale funds, if monitored, will be like the fixed deposits which can not be used at men’s will,” said an anonymous financial director from a property company.

In addition, the source said that the government will issue the policy of the developers’ credit accounts monitored by a third party. The so-called account monitored by the third party means that the bank doesn’t put the loans directly into the developer’s account; instead, it sends money to the third-party supervisor, who then gives the money to the developer step by step according to the progress of project. This can prevent the illegal use of pre-sale funds committed by the developers. In addition, the developer should pay for 30% of project cost in advance. Meanwhile, the developer should sign contracts of construction with the contractor. With these two conditions fulfilled, the bank can lend the developer loans in amortization through a third party.

“This policy aims at preventing the developers from seizing and reserving land. It is more and more difficult for the property developers to get loans than before. These who use the loans for blind expansion is threatened by the to-be-broken capital chains,” said Pan Shiqi.

Severely Striking Intentional Land Reserving

On March 16, the Ministry of Land and Resources published the “Notes about Enhancing the Supervision of the Land Supply for the Property Developers” (hereafter the Notes), aiming at controlling the intentional land reserving and related speculations.

In 2009, the developer nearly met no difficulties in getting the land. The record of highest land prices kept being refreshed. The four largest property companies spent 93 billion yuan (USD 13.6 billion) in the land reserving.

Though in the parliamentary sessions in March came out the requirements of “keeping the house prices from increasing too fast”, the land market in China still failed to get back the rationality at that moment. On March 15, the record of land price in Beijing was refreshed for 3 times.

In order to put an end to the crazy activity, the government worked out strict conditions for the land transfer in the Notes: a), the bidding bail should not be lower than 20% of the lowest land price; b), the down payments which take 50% of the turn volume must be paid off in a month after the deal and the rest in one year. Meanwhile, the land bidders are put into stricter examinations. The land users who delay paying the land transfer fees, leave the land unused, reserve land intentionally, speculate in land deals or develop property project beyond their ability, should be forbidden to attend the land bidding for a certain period. The illicit land using activities should be punished severely.

“To leave the land unused after getting the land will result in serious problems,” said a property developer. “The Notes represents the most serious strike of government upon land reserving and related speculations.”

According to the public data, the ten major property companies in China have intentionally reserved 300 million square meters of land. Most of them are left unused. The Notes, which is much stricter than any other regulation and control policy, will put an end to this situation. The companies violating this stipulation will be forced to return the land without getting back the bail.

Zou Xiaoyun, deputy engineer-general of China Land Survey Institution, said that the Notice’s biggest objective is to fight against the speculations in the land market, putting the unused land into practical use. Influenced by the Notes, the developers who have intentionally reserved a large piece of land without using it will be confronted with the strained or even broken capital chain. However, the final effect of the Notes depends on how the local governments implement it, said Zou

Financing Predicament

Haunted by the strained capital chain, the property developers have to find diversified channels of financing.

The banks have already raised the interest rate for the property developing loans. The watchdog has warned those banks who illegally lend loans to property developers. Punishment will be seen for these malpractices. The commercial banks in China are required to “have strict control over the risk of property developing loans”.

This undoubtedly raised the position of banks in the negotiation about lending loans,” said an insider from a bank. His bank strictly follows the government stipulations and only lends loans to the high-quality customers with established reputation in the industry. The interest rate also increases to 10% and 20%.

Another reason for strained capital chain is the credit crunch. On May 10, People’s Bank of China, or the central bank, increased the deposit-reserve ratio – the third time in this year. Previously, some local governments issued the policies about deflating the loans for buying the second house, including the minimum proportion of down payment and so on.

“The credit crunch will influence the property industry. In addition to the decreasing sales, the small- and medium-sized property companies are hard to survive,” said a financial director of a medium-sized property company. His company can not get loans right now because the bank put forward the requirements about the proportion of self-owned capital (50%) in addition to mortgaging the land. His company is struggling to survive.

With smaller access to the credit loans, some property companies think of trust financing. However, the cost of trust financing is much higher than the bank loan. In 2008, the financing cost through trust for the property companies nearly took 20% of their annual revenue. This year, more and more requirements are needed for trust financing, making it more difficult than ever before.

Some companies want to solve the problem through additional shares. However, this plan was seriously affected by the depressed stock market in China.

Some companies, like EverGrande, choose to rely on the overseas financing. According to the report, the total amount of financing has reached 2 billion US dollars. But this method is accompanied with great cost. EverGrande has to endure the 13% bond rate.

Influenced by the massive control and waning trading volume, some property companies, said some experts, can not survive. “This is a period featured with industrial restructuring. Once the capital chain has the problem, the enterprises have to integrate their assets, which is usually followed by the increasing number of acquisitions.”