Developers In China Scramble To Raise Cash

Source : The Business Times, December 4, 2008

(BEIJING) Suffering from a slumping housing market, Chinese developers are scrambling to find new ways to keep the cash flowing in and creditors at bay, with anything from factories to timeshares in their sights.

An oversupply of new apartments in an economic downturn, and the lingering effects of government steps to stamp out rampant property speculation have sent home sales and prices tumbling.

Capital markets are closed, and loans have dried up.

'Banks give you an umbrella when it's sunny and want it back when it's raining,' said Li Xiaodong, chairman of J&J Assets Management, whose US$300 million fund invests with property firms.

'So you have to choose products that are more suitable for the market at the moment,' he advised developers at a conference in Beijing. 'There's money out there, but there's no confidence.'

In a five-year boom, China's developers grew quickly and notched up huge profit margins, often of as much as 50 per cent, as they built on land accumulated cheaply and sold apartments in a fast rising market.

But many who bought land at a 2007 price peak are suffering now, with sales down by as much as half from last year. The country's biggest developer, China Vanke, has slashed prices by a third, and others have gone further. And now they are looking away from housing. Beijing-based Antaeus Group is selling rooms at Hainan island resorts, giving buyers stays of 30 days each year and a share of room rates.

'A lot of movie stars and real estate developers are buying,' said the firm's chairman, Zhang Baoquan. 'We need to survive the winter,' he said of the market downturn. 'But once spring comes, demand will be released.'

Shanghai-listed developer Vantone Estate aims to spend three billion yuan (S$667.2 million) on industrial property in the next couple of years, according to Wu Dongwei, general manager at the unit responsible for the venture.

His first deal, which is still being negotiated, is for a factory in Wuxi that will be bought and leased back to a television maker faced with slowing exports.

'We're trying to diversify,' Mr Wu told Reuters. 'There are a lot of companies that bought a lot of land very cheaply, or for zero because local governments gave it to them,' he added. 'But now is a very bad time, so they're trying to get more cash in and divesting assets.'

Holding investment properties usually produces much lower returns on assets than building homes because equity is tied up for much longer.

But Hong Kong developers have used the tactic well to smooth earnings, in a volatile property market. Office and retail rents are typically renegotiated every three years, while industrial and warehouse property leases can last a decade. -- Reuters