Chinese property developers’ cash flows plunged more than 20%

Analysts generally expect public companies to perform better than non-public developers in the latest housing crisis. Pictured here in Guangxi, China on August 15, 2022, is a building complex being developed by state-owned conglomerate Poly Group.

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BEIJING — Cash flow for Chinese property developers — a sign of companies’ ability to stay afloat — has shrunk this year after steady growth over the past decade, according to Oxford Economics.

Developer cash flow through July is down 24% year-on-year on an annualized basis, according to analysis by the company’s chief economist, Tommy Wu.

That’s a sharp slowdown in growth nearly every year since at least 2009, the data shows. Total funding in July was 15.22 trillion yuan ($2.27 trillion) on an annualized basis, compared to 20.11 trillion yuan in 2021.

The drop comes as demand for credit in China beat expectations in July and the struggles of property developers drag on.

About two years ago, Beijing began cracking down on developers’ heavy reliance on debt for growth. Notably, Evergrande defaulted late last year. Other developers like Shimao have also defaulted, despite appearing to have healthier balance sheets.

As investors have grown cautious about Chinese real estate companies, developers now face the risk of losing another important source of cash flow: prepayments from homebuyers.

Houses are usually sold before completion in China. But since late June, some homebuyers have protested delays in building apartments by halting mortgage payments.

“The crux of the problem is that property developers have insufficient cash flow – whether due to debt service charges, weak home sales or misuse of funds – to continue projects,” Wu said in a report last week.

“Addressing this issue will restore buyer confidence in developers, which will help support home sales and therefore improve the financial health of developers.”

More than $2 billion in high-yield property developer debt is due in September, more than double that of August, according to Morgan Stanley analysis as of August 10.

About a quarter of homebuyers who bought a property before completion are willing to stop their mortgage payments if construction is put on hold, the U.S. investment bank said in an Aug. 15 report, citing an AlphaWise homeowner survey of consumers.

Not only does real estate account for the bulk of household wealth in China, but analysts estimate that properties and real estate-related industries account for more than a quarter of China’s GDP. The real estate crisis has contributed to a general slowdown in economic growth this year.

In an effort to support growth, the People’s Bank of China cut rates, including an unexpected 10 basis point cut on Monday in some one-year interest rates for institutions, known as the lending facility. medium term.

While the PBOC may hope the cut could ease some of the burden on homebuyers and help developers get loans, the issue isn’t just about financing, said Bruce Pang, chief economist and head of research. for Greater China at JLL.

He noted how developers found it harder to secure financing on their own and had to rely more on pre-sales to homebuyers. But people are increasingly cautious about buying new homes because of their expectations for future employment and returns from existing investment products, he added.

Despite several reports of government plans to maintain funding for developers, the central government has yet to officially announce broader support for real estate. A reading from a high-level government meeting last month said local governments are responsible for the delivery of completed houses.

Among the top three sources of developer funding, installments and deposits have fallen the most this year, down 34%, according to Wu’s analysis.

Credit as a source of funding fell 22%, while self-raised capital, including stocks and bonds, fell 17%, according to annualized data.

Investors turn away from Chinese ownership

Investment funds have largely steered clear of Chinese property developers, narrowing a potential source of funding.

“What is worrying is the lack of will and speed among key policy makers to address property developer funding issues,” said Carol Lye, deputy portfolio manager at Brandywine Global, in an email response. mail to CNBC.

Lye said the investment management firm’s allocation to Chinese real estate was low and Brandywine held “high-quality real estate bonds that have been favored in terms of government support.”

Some investors have even turned to companies from other parts of Asia.

“We’ve liquidated almost all of our holdings in Chinese residential. It’s more of a wait-and-see game in terms of getting exposure back,” said Xin Yan Low, Singapore-based portfolio manager for Asian real estate stocks at Janus Henderson. She declined to share a timeline of those sales.

“There are still plenty of alternatives in the region, especially with reopening now, Singapore, Australia, basically back to full reopening, the fundamentals are strong,” she said.

Top holdings in its co-managed Horizon Asia-Pacific Property Income Fund include Japan Metropolitan Fund Invest, Mapletree Logistics Trust and Hang Lung Properties.

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Morningstar’s Patrick Ge said in a report this month that some funds have shifted from Chinese real estate to other high-yielding Asian sectors, such as Indian renewable energy companies and Indonesian real estate.

Overall, the report says money invested in Chinese property funds fell 59% over six months.

But the report said investment giant BlackRock is among the companies buying Chinese property bonds, including those from Shimao.

The asset manager did not respond to a CNBC request for comment.

– CNBC’s Michael Bloom contributed to this report.

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