Tuesday, September 9, 2008

China Developers Hard Pressed, Not Distressed Yet

Source : The Business Times, September 9, 2008

Govt moves to ease property curbs cool funds' firesale hopes

(HONG KONG) Bargain Chinese property projects will be up for grabs in coming months as developers scramble to survive falling home sales and a funding crunch.

But circling foreign funds can no longer expect a big firesale as the Chinese government eases its tough steps to cool the market, fearing mass bankruptcies and a property price slide that would send a shiver through the economy.

In the balance: With loans to developers down 30% in the first half of this year, many firms are vulnerable, especially if they took part in a land buying frenzy last year

When Beijing upped the ante in a fight against property speculation at the end of last year by ruling that buyers of second homes must pay 40 per cent in equity, apartment sales and prices slid in the southern cities of Guangzhou and Shenzhen.

Developers, already squeezed by a land appreciation tax and a clampdown on bank lending, then found that capital market turmoil closed off share and debt issuance.

Some fund managers believed their time had come, and cheap deals would open up a Chinese property market where a yearly influx of 8 million people into cities promises long-term riches.

They are still waiting. 'We expected there to be a lot more guys going under and a lot more forced sale situations,' said Chris Gradel, managing partner at Pacific Alliance, which manages about US$4.5 billion in alternative asset funds targeted at China and Vietnam.

Describing the resilience of Chinese developers as 'one of the biggest surprises of the year', Mr Gradel said property firms had muddled through with presales, delayed payments to contractors, and borrowing from banks and other sources.

Local authorities have also been stretching payment schedules for land, and choosing not to implement a government edict that developers lose land if they fail to build within two years.

However, with bank loans to developers down 30 per cent in the first half of this year to 399 billion yuan (S$83 billion), according to the central bank, thousands of firms are vulnerable, especially if they took part in a land buying frenzy last year.

'The guys who blew all their cash in the second half of last year are the guys who are having the most trouble,' Mr Gradel said. 'I think there's a good chance we'll see some more distress over the rest of the year.' So far, few bankruptcies have been reported, even as Beijing and Shanghai home sales fell by half in July from a year earlier.

Nanjing property tycoon Liu Fulin abandoned his home building business in February in favour of pig farming when hog prices soared, local television reported.

Another firm in the eastern city, Nanjing Panlong Jinling Property Development Co, went bankrupt in July, according to property website focus.cn.

The downturn was best illustrated by Changhui, one of the country's biggest property agencies, which closed half its 1,800 outlets late last year as sales dried up.

Property price falls must soon follow, analysts say, but developers appear to be holding out, with homes an average 7 per cent more expensive in July than a year earlier.

Government austerity measures are at the root of the housing slowdown.

But the policies were conceived to narrow the gap between rich and poor, not to suppress the property market, economists say, as the government is wary of damaging an industry that accounts for 8 per cent of gross domestic product (GDP).

Beijing is widely expected to relax its stance in early 2009.

'In China, it really depends on the macro-economy and the kind of government policy that is going to be put in place,' said Wilkie Lai, director and chief risk officer at Tribridge Investment Partners, a fixed-income focused hedge fund manager.

'Tightening is not the keyword anymore'.

The prospect that the market will bounce back strongly is giving hope to foreign investors.

US banks Citigroup and JP Morgan have said they are keen to spend their own money and their managed funds in China, expecting developers to offer plum deals.

Morgan Stanley , which bought distressed property assets from Chinese banks in the early 2000s, is targeting China for nearly a fifth of a US$10 billion global real estate fund it is raising, Reuters reported last week.

With shares in Chinese developers down about 70 per cent since a peak last November, as many as 30 Chinese developers have shelved IPOs planned for this year and are looking for foreign funds for capital to finish their projects.

The listing candidates often took on pre-IPO funding from private equity and hedge funds, and will have to repay investors soon if they do not push through stock market listings.

'These developers are refinancing, or selling land and offering joint venture projects to raise money,' said Anthony Ryan, head of Asia property investment banking at JP Morgan.

'An increase in restructuring activities will appear between now and the first quarter of next year.' But even when developers are forced out of business, foreign funds are found jostling at the back of the queue of buyers.

'If there are good opportunities they're taken up by other developers in off-market deals, very quietly,' said Hendrik Broeker, national director for Asia capital markets at consultants Jones Lang LaSalle in Hong Kong. -- Reuters

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