Sector Review:
China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
Primary Credit Analyst: Bei Fu, Hong Kong (852) 2533-3512; [Link]@[Link] Secondary Contact: Christopher Lee, Hong Kong (852) 2533-3562; [Link]@[Link]
Table Of Contents
Support For Liquidity Risks To Liquidity Credit Conditions Are Mixed Changing Places Related Criteria And Research
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Sector Review:
China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
(Editor's Note: This article is part of our "China Credit Spotlight" series, which discusses the credit conditions for China's sovereign, key sectors, top 150 corporates, and top 50 banks.) China's weakest real estate developers could find it more difficult or costly to borrow this year. Interbank lending froze in June, triggering a credit crunch. The central bank's decision not to pump cash into the money markets in response was likely aimed at reining back the country's growing "shadow banking" system. Developers that have been shut out from other channels have frequently tapped these alternative funding sources, which include trust companies. In July, the People's Bank of China removed the floor at which banks can lend. The move will most likely benefit big developers because interest rates on bank loans could fall as competition among lenders intensifies. Smaller players may still have limited access to bank loans because they remain vulnerable to economic cycles. Standard & Poor's Ratings Services believes the two recent events may point to a changing credit environment. But the implications for liquidity and refinancing risks vary by company. Overview Developers are cash-rich thanks to strong sales in the first six months of the year. Aggressive land purchase activities may drain cash and make acquisition-hungry developers vulnerable in a sudden market downturn; but risk appetites appear reasonable. Onshore lenders will continue to be selective and favor industry leaders; weaker developers may face a tighter credit environment and higher financing costs. Strong liquidity over the past 12 months has helped many developers to refinance at lower rates and extend their maturity profiles. For weaker players, M&A may offer a lifeline; consolidation will continue.
China's new leadership appears intent on stamping out excessive credit growth, following pump-priming in the economy since 2009 and concerns about rising bad loans. The central government may take steps to reduce the availability of credit and increase funding costs for companies. The effects may start to be felt in the next six to 12 months. We believe the largest developers have sufficient fundamentals to absorb a potential credit squeeze. Strong sales in the first half of this year have increased liquidity buffers as refinancing risks have eased. For some developers, strong sales have refilled their war chests for land acquisitions and expansion. We believe the major players have sufficiently healthy liquidity for the next six to 12 months, at least. But weaker developers could still struggle. We maintain our stable outlook on the sector. Rating trends are neutral because improved liquidity positions and
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Sector Review: China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
reduced refinancing pressure should help developers to weather a credit crunch. Any upgrades and downgrades over the next six to 12 months will depend on company-specific factors. Most of our rated developers, including those that we rate at 'B+' and below, are considered to be large developers in China.
Support For Liquidity
Regulations should be stable
We expect regulatory risks to be neutral to slightly negative. We don't expect the central government to introduce any drastic new measures for the next six to 12 months. A stable property market would support China's economic growth target at a time when exporters, manufacturers, and heavy industries are under strain. We believe local governments are likely to more strictly implement existing regulations or introduce minor measures if land and property prices rise sharply. China's real GDP growth slowed to 7.6% in the second quarter of 2013, compared with 7.7% in the previous three months. The government is targeting real GDP of 7.5% growth this year. Standard & Poor's base-case forecast is 7.3% for 2013, and we even see some downside risk to this figure. Much of the GDP growth may need to come from domestic consumption, given a still-uncertain global economic outlook.
Sales will remain active
We believe the sales outlook for developers could weaken over the last six months of 2013. That's because most developers have less need to aggressively promote sales because they achieved strong results in the first half of the year. But most rated developers should still be able to meet their full-year targets. Volume is unlikely to drop materially because we expect supply to increase as developers plan to launch more new sellable space in the second half. Potential owner-occupiers don't appear to expect prices to decline sharply. Average selling prices (ASP) are likely to stay flat or slightly dip. Price increases should be limited because we expect credit conditions to weaken and the sales outlook to be less favorable. In the first six months of 2013, the ASP for 100 Chinese cities rose 4.5%, against our full-year base case of 5% growth.
Risks To Liquidity
Sales will be polarized
Sales performances are likely to be uneven across the sector for the next six to 12 months. Large players such as China Vanke Co. Ltd., Greenland Group, Poly Real Estate Group Co. Ltd., and China Overseas Land & Investment Ltd. generated sales of about Chinese renminbi (RMB) 60 billion in the first six months of 2013. Some rated developers achieved over 50% year-over-year growth in sales, including Sunac China Holdings Ltd., Country Garden Holdings Co. Ltd., and China Resources Land Ltd. On the other hand, small developers could still struggle to meet their full-year targets, such as Glorious Property Holdings Ltd., Mingfa Group (International) Co. Ltd., and Powerlong Real Estate Holdings Ltd. Small developers are vulnerable to shifting credit conditions and sensitive to increasing competition.
Land costs are rising
If land costs continue to rise, the central government could step in with additional cooling measures. Land revenue for
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Sector Review: China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
local governments rose significantly over the first half of this year. For example, Beijing collected RMB63 billion in the first six months, 350% year-over-year growth, according to property agency Centaline. Land acquisitions will remain active for those developers that have sold large gross floor area in the past year to replenish their land reserves. In our view, most rated developers have a rational approach to the management of land costs and land acquisitions. Kaisa Group Holdings Ltd., however, has become more aggressive in the land market than we previously expected despite the uncertain market outlook. The cash flow and liquidity of developers that pay high for opportune purchases will come under stress if the market takes a sudden turn. As competition for land heats up and land costs rise, more and more developers are buying projects through joint ventures. Such structures could raise operational or financial issues if the parties can't work well together. The benefits of joint ventures are that developers can share risks and investment costs, and avoid bidding wars for land. However, joint-venture structures can impede our analysis as information on projects isn't always readily available.
Credit Conditions Are Mixed
Onshore lenders will likely remain selective and favor industry leaders. The availability of credit could become more limited for weaker players, which may face higher financing costs. Regulatory scrutiny of trust loan financing could make it more difficult to obtain. Most developers we rate have reduced their exposure to costly trust financing in the past 12 months through lower-cost offshore funding in bonds and syndicated loans. Recent news reports suggest onshore equity markets may start to open up to developers. The markets have been closed off to the industry since 2008. However, we are skeptical whether the timing is right to open up this channel, given that the sector is still red hot despite tight regulations. Activity in offshore bond markets is likely to remain relatively subdued this year because funding costs have risen in recent months. Offshore bank loan markets have been particularly active lately. Several smaller developers obtained offshore bank facilities for the first time, including Sunac China, Greentown China Holdings Ltd., CIFI Holdings (Group) Co. Ltd., and Golden Wheel Tiandi Holdings Co. Ltd. Repeat borrowers, such as Longfor Properties Co. Ltd. and Agile Property Holdings Ltd., have been able to secure large loan facilities. We expect this trend to continue for other developers as Chinese banks become more active in the syndicated loan market in Hong Kong.
Changing Places
We see limited refinancing risk for the sector over the next six to 12 months. Strong sales this year and good access to funding in the past two to three quarters have helped developers to refinance their fixed-term, high-cost trust loans and offshore obligations. A few developers have large maturities coming due, such as Evergrande Real Estate Group Ltd., which has RMB5.55 billion due early 2014. Evergrande's sales have been good with reasonable margins this year. We expect the company to have sufficient internal resources to repay or refinance its bond. Default rates are likely to remain low in the next six to 12 months. But Renhe Commercial Holdings Co. Ltd. is one rated developer that has a higher risk of defaulting over the next year because it may struggle to achieve sufficient
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Sector Review: China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
sales to meet its financial obligations. Also, the company doesn't own land titles and therefore has limited disposable assets to help it stave off a liquidity crunch. We expect industry consolidation to speed up over the next few years. During the first six months of 2013, the top 10 players accounted for about 15% of the market. We estimate their market share could reach 20% over the next three years. Differences between the costs and the availability of funding are likely to continue to widen between large and small developers as loan growth for the sector slows down from a high of 129% year over year in the first half of 2013. Weaker developers may look to mergers and acquisitions to provide liquidity support. For example, Greenland is buying SPG Land Holdings Ltd. for that reason. Larger national players with increasingly better access to low-cost funding will have abundant acquisitions targets as smaller players struggle to adapt to a changing market. Industry polarization and consolidation are clearly deepening. Contract Sales Of Rated Chinese Real Estate Developers
2012 (bil. RMB) Actual sales Agile Property Holdings Ltd. Central China Real Estate Ltd. China Overseas Land & Investment Ltd. China Resources Land Ltd. China SCE Property Holdings Ltd. China Vanke Co. Ltd. CIFI Holdings (Group) Co. Ltd. Country Garden Holdings Co. Ltd. Evergrande Real Estate Group Ltd. Fantasia Holdings Group Co. Ltd. Franshion Properties (China) Ltd. Future Land Development Holdings Ltd. Gemdale Corp. Glorious Property Holdings Ltd. Greentown China Holdings Ltd. Hopson Development Holdings Ltd. Kaisa Group Holdings Ltd. KWG Property Holding Ltd. Longfor Properties Co. Ltd. 33.1 10.4 90.5 52.2 6.0 141.2 9.5 47.6 92.3 8.0 15.5 16.1 34.2 10.9 51.1 11.2 17.3 12.2 40.1 Target Actual/target sales sales (%) 31.0 9.0 81.2 40.0 4.0 141.0 8.0 43.0 80.0 7.2 15.5 16.1 31.0 13.0 40.0 12.0 16.5 12.0 39.0 107 115 112 131 150 100 119 111 115 111 100 100 110 84 128 93 105 102 103 Jan-June actual sales 16.1 6.1 63.4 33.8 5.2 83.7 7.2 33.7 44.6 3.7 10.0 7.6 19.7 4.0 29.4 5.6 11.0 8.1 22.4 Full-year target 42.0 12.6 80.0 57.0 7.5 166.0 12.5 62.0 100.0 10.5 18.0 20.0 40.0 11.0 55.0 15.0 22.9 16.0 46.0 2013 Jan-June sales/full-year target (%) 38 48 79 59 69 50 57 54 45 35 56 38 49 37 53 37 48 50 49
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Sector Review: China Credit Spotlight: The Lending Landscape Is Shifting For Property Developers
Contract Sales Of Rated Chinese Real Estate Developers (cont.)
Mingfa Group (International) Co. Ltd. Poly Real Estate Group Co. Ltd. Powerlong Real Estate Holdings Ltd. Road King Infrastructure Ltd. Shanghai Industrial Urban Development Group Ltd. Shanghai Zendai Property Ltd. Shimao Property Holdings Ltd. SOHO China Ltd. SPG Land Holdings Ltd. Sunac China Holdings Ltd. Yanlord Land Group Ltd. Yuzhou Properties Co. Ltd. Total 5.3 101.7 6.5 9.6 3.9 1.9 46.1 9.5 3.0 31.6 12.1 6.5 936.0 5.2 100.0 6.0 9.6 3.3 3.1 30.7 12.0 4.0 30.0 12.0 5.0 857.8 103 102 108 100 117 62 150 79 75 105 101 131 92 2.5 63.6 2.9 6.9 2.7 0.7 32.5 2.8 1.7 20.3 4.5 5.7 562.0 8.1 120.0 8.1 11.0 3.8 3.3 55.0 7.0 4.0 34.4 13.0 8.0 1,069.6 31 53 36 63 71 22 59 40 42 59 35 71 53
Note: (1) We took the mid-point of the sales target range of Shanghai Zendai Property Ltd. (2) China Vanke and Road King didn't disclose their sales targets; we used our base-case for 2013 and actual sales for 2012 target. Source: Company data.
Related Criteria And Research
Lower-Rated Chinese Real Estate Developers Remain Vulnerable To Market Shifts, July 23, 2013 Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
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