According to Fitch Ratings, as many as one-third of the 40 Chinese property developers that were assessed by the company might face a financial crunch if home sales revenue declines by 30 per cent next year.
“The longer the stresses on China’s property sector last, the greater the risk of a loss in consumer confidence,” Fitch said in a Dec. 20 report.
In recent months, China’s real estate market has been plagued by a financial crisis, as the world’s most indebted developer Evergrande’s liquidity issue came to a head. It eventually defaulted early this month, and other Chinese developers began to exhibit symptoms of stress as well. Some people missed interest payments, while others completely defaulted on their obligation.
On September 15, 2021, a man walks through incomplete residential towers at Evergrande Oasis, a housing development planned by Evergrande Group in Luoyang, China. The photo was taken on September 15, 2021.
Evergrande, a troubled Chinese developer, is on the verge of bankruptcy. Here’s why it’s important:
Homebuyer confidence sank, and so did residential sales. In November, home sales by value fell 16.31 per cent from the previous year, marking the fifth consecutive month of reductions.
According to Reuters, prices of new home declined 0.3 per cent from the previous month, which was the sharpest drop since February 2015.
In a worst-case scenario, when residential property sales decline by 30%, 12 of Fitch’s 40 rated developers, or approximately a third, might plunge into negative cash flow, according to the analysis. In Fitch’s base case — a less severe scenario — a 15% drop in home sales may result in a cash deficit for around 13% of its rated developers.
According to Nomura analysts, Chinese developers will face $19.8 billion in expiring offshore, US-dollar denominated bonds in the first quarter and $18.5 billion in the second. According to the experts, the first-quarter figure is roughly double the fourth-quarter total of $10.2 billion in maturities.
Real estate developers are expected to face significantly more bond maturities in the next year.
Fitch predicts that developers with a credit rating of “B” or lower will experience increasing pressure to repay offshore debt, with maturing or putable offshore bonds in 2022 having higher principal amounts due than in 2021. Putable bonds give bondholders the option of forcing the issuer to redeem the bond before it matures.
A “B” grade indicates that there is a considerable danger of default, but there is a small margin of safety.
As the financial crisis progressed, questions about the lack of openness surrounding developer liability developed.
“Some distressed credits over the past few months have also cast doubt over the transparency of companies’ disclosures and contingent liabilities,” Fitch said.
Fantasia, for example, had a private bond that was not reported in the company’s financial records, which Fitch noticed in October.
“The emergence of ‘hidden private debt’ compounds liquidity strains, particularly for lower-rated developers with large upcoming bond maturities,” Fitch said in the report last week.
According to Fitch, such concealed debt includes undeclared debt and guarantees for joint venture, associate, and other third-party loans that allow developers to avoid China’s “three red lines” debt restrictions.
This strategy limits debt in relation to a company’s cash flows, assets, and capital, and is intended to rein in developers after years of debt-fueled growth.
Analysts predict that the market conditions that are affecting developers will not improve until next year.
Monica Hsiao, founder, and chief investment officer of Triada Capital, believes China’s high-yield bonds, which are essentially real estate bonds, will “bottom” in the first half of next year.
“Because the market is really waiting to see if the government’s pain threshold for more material policy easing hits, and a lot of the market believes that it’s going to be within the first quarter,” she told CNBC’s “Street Signs Asia” on Friday.
(Adapted from CNBC.com)