Property developers set to ride out market turbulence

Analysts say conditions may be challenging but bright spots abound

China's property developers will ride out challenging market conditions like slowing sales growth, debt pressure and fewer financing channels and see a stable 2017 marked by slower yet positive growth, industry analysts say.

Debt management will improve, demand for housing in key cities will be sustained and the "develop-and-manage" model will find acceptance, which will help developers explore new paths for development, they say.

"Concern about surging debt pressure seems to have found a solution, with more developers using financial tools to hedge risks," says a research note from Ping An Securities.

China's real estate developers have been clearing their US dollar-denominated debts to prevent losses as the currency has been strengthening against the Chinese yuan in recent months, a situation that may pile more pressure on smaller players than bigger ones.

The financial health of developers worsened recently as sales slowed due to policymakers' moves against potential overheating in the residential market in key cities and speculative buying, the analysts say.

Dollar-debt issuers have been learning lessons from the past. They are reducing losses caused by exchange rate fluctuations through swap transactions or by retiring debts well before maturity.

Issuing US-denominated bonds in overseas markets was a major financing channel for many developers in the past three years. Interest rates were lower than other channels. But now, this "low-cost" financing option is no longer economical, as the dollar has gained more than 3 percent against the yuan in the past two months.

According to data from Shanghai-based Wind, a financial information provider, China's real estate developers have been retiring dollar-denominated debts before maturity since the beginning of November. So far, they have cleared debts of more than $1 billion (940 million euros; 788 million).

For instance, on Nov 28, Hong Kong-listed, Chongqing-based LongFor Properties Co informed the Hong Kong Stock Exchange that it had redeemed callable bonds of $417 million maturing in 2019.

Analysts say that such moves will help developers reduce losses caused by exchange rate fluctuations and will help create more room for further financing.

"The trend is that more developers who bought US dollar debts are going to do the same, as they are likely to shift from overseas markets back to the domestic market for financing," says Zhang Dawei, an analyst at Centalaine Property.

A research note from Moody's, which rates 50 listed developers in China, says the outlook for developers for 2017 is "stable" as support from market demand remains, income is steady and pressure for financing and refinancing is under control.

"Credit indicators of rated developers ... have been improving, creating easier financing conditions that potentially bring more liquidity to the market. The total size of developers' debts that mature in 2017 is relatively small, and both loan and bond markets are open to developers, so risks for refinancing are under control," says Yang Liu, an analyst with Moody's, in the research note.

The report says that the risks developers face are largely not from external market conditions but from internal factors, including decreasing support from the parent group concerned or disagreements among shareholders, which vary case by case.

Only two out of 50 rated developers are facing considerable pressure in re-financing, says Moody's.

Ren Zhiqiang, former chairman of real estate company Huayuan Property Co Ltd and a real estate market veteran, says as long as economic growth is positive, job opportunities will increase, urbanization will proceed apace, solid demand for residential properties in key cities will remain robust and developers that hold quality projects in such cities are likely to see stable cash flow through sales.

Urbanization and China's shifting economic growth pattern, driven by consumption, will generate more diversified demand, giving developers more opportunities to come up with new types of project, say analysts.

A research note from CICC says that about 100 million residents will be migrating to urban areas in the next few years, creating a leasing market whose size will exceed 1 trillion yuan ($144.91 billion; 136.2 billion euros; 114.3 billion).

"We expect that long-term leasing services will take some 20 percent of the entire leasing market in the next few years, and it is observed that more developers are entering this market," says the research note.

Increasing numbers of developers listed in Shanghai, Shenzhen and Hong Kong are also adopting more sophisticated business models, shifting from previous "develop-and-sell" to "develop-and-manage".

Some developers are building up communities that integrate commercial properties, residential properties, and public facilities all together, say analysts.

wuyiyao@chinadaily.com.cn