Analysts generally expect state owned companies to outperform non government developers in the latest real estate crisis. Pictured here in Guangxi، China، on August 16، 2022، is a real estate complex developed by the state conglomerate Poly Group.
BEIJING Chinese real estate developers cash flows a sign of the firms ability to survive shrank this year after steady growth over the past decade، according to Oxford Economics.
Developer cash flows through July have fallen 24 percent year over year، according to an analysis by the company’s chief economist Tommy Wu.
That’s a sharp slowdown in growth for nearly every year since at least 2009، the data shows. Total funding in July was 15.22 trillion yuan “$2.28 trillion” year on year، up from 20.13 trillion yuan in 2021.
The decline comes as credit demand in China exceeded expectations in July and real estate developers troubles dragged on.
About two years ago، Beijing began cracking down on developers heavy reliance on debt for growth. Evergrande، in particular، defaulted at the end of last year. Other developers like Shimao have also failed، despite appearing to have healthier balance sheets.
While investors have become cautious about Chinese real estate companies، developers now risk losing another important source of cash flow: home buyers prepayments.
In China، homes are usually sold before delivery. But since late June، some homebuyers have been protesting delays in apartment construction by halting mortgage payments.
The crux of the problem is that property developers don’t have enough cash flows whether it’s debt servicing costs، low home sales، or misuse of funds to move forward with projects، “Wu said in a report last week.
Solving this problem will restore home buyers confidence in developers، which will help support home sales and، in turn، improve developers’ financial health.”
More than $2.1 billion in debt for high-yield property developers must be paid in September 2022 that’s more than twice as much as in August, according to Morgan Stanley’s analysis on Aug. 11.
About a quarter of homebuyers who bought property before it was ready are likely to stop their mortgage payments if construction is suspended، the U.S investment bank said in an Aug. 16 report، citing its own AlphaWise Consumer Survey.
Not only does real estate account for the bulk of household wealth in China، but analysts estimate that real estate and industries related to real estate 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 has cut interest rates، including an unexpected cut on Monday of 11 basis points in the one year institutional interest rates known as the medium term lending facility.
While the PBOC may hope the austerity cuts can ease some of the burden on homebuyers and help developers get loans، the problem isn’t just about funding, said Bruce Pang، chief economist and chief of research for Greater China at JLL.
He noted how developers have found it more difficult to get financing on their own and have had to rely more on presales to home buyers. But people are increasingly cautious about buying new homes because of their expectations for future employment and returns on existing investment products, he added.
Despite multiple reports of government plans to keep developers funded، the central government has yet to officially announce wider support for real estate. A readout from a high level government meeting last month said: local authorities are responsible for the delivery of completed homes.
Of the top three funding sources for developers، prepayments and deposits have fallen the most this year، at 35%، according to Wu’s analysis.
Credit as a source of funding fell 23 percent، while self raised capital، including stocks and bonds، fell 18 percent، year over year data shows.
Investors are turning away from real estate in China:
Mutual funds largely stayed away from Chinese real estate developers، reducing a potential source of funding.
What was worrisome was the lack of willingness and speed from top policymakers in solving real estate developers financing problems “Tom Lye، assistant portfolio manager at Brandywine Global، said in an emailed response to belg12.
Tom said the investment manager’s allocation to real estate in China is low and that Brandywine “has high quality real estate bonds that have been favored in terms of government support.”
Some investors have even turned to companies in other parts of Asia.
We have exited almost all of our holdings in Chinese residential companies. It’s more of a wait and see when it comes to regaining exposure،” said Tom Yan Low, portfolio manager for Asian real estate stocks in Singapore at Janus Henderson. He declined to share a timetable of those sales.
There are still a lot of alternatives in the region, especially with the reopening now Australia، Singapore basically back to full reopening، the fundamentals are strong” he said.
Top positions in its jointly managed Horizon Asia-Pacific Property Income Fund include Japan Metropolitan Fund Invest، Mapletree Logistics Trust and Hang Lung Properties.
Morningstar’s Patrick Ge said in a report this month that some funds have turned away from real estate in China to other high yield sectors in Asia، such as Indian renewable energy companies and Indonesian real estate.
Overall، the report said money invested in Chinese real estate funds fell 59 percent in 6 months.
But the report said investment giant BlackRock was one of the companies buying Chinese real estate bonds، including those from Shimao.