"Winter is coming" so property developers in China have been warned as President Xi Jinping has tightened his grip on power and hardened official resolve to bring down the country's onerous stock of oustanding debt.
With Beijing seeking slow credit growth and restrict access to bank and other capital since late last year, the real estate sector is expected to enter what some industry executives dub a “winter of funding”.
Even so, it's not the end of the world for China’s developers, especially larger players, since many of them, both state-owned and private, have deep pockets after raising pots of capital by selling apartments in a red-hot market.
The reining in of credit also provides a ripe opportunity for speeding up consolidation, a property industry conference in Hong Kong was told last week.
“Consolidation happens not only at project level, but at company level as well,” Wei Deng, president of Century Bridge Capital, a private-equity firm specialising in China’s second-tier cities, said at the gathering. “In the latest round of tightening, small developers find it difficult to survive because local banks have stopped providing construction loans to them and the government has imposed limitations on their selling price.”
In addition to mainstream bank lending, policymakers in Beijing have tried to limit the capacity of property developers to raise funds via alternative channels, whether through the asset management unit of a bank, trust companies, or special purpose vehicles set up by insurance firms.
For the cash-rich, though, that isn't a problem.
“On the other hand, more developers are joining the...so-called billion-dollar sales club, showcasing their size and revenue figures in front of government officials, bankers and home buyers,” said Deng, a former dealmaker at Carlyle and Merrill Lynch. “The sales figures mean that you’re a well established player and people can trust on you.”
Country Garden, Vanke, and Evergrande each posted more than Rmb500 billion ($79 billion) of contracted sales during 2017, followed by Sunac China with more than Rmb365 billion.
In total, the largest 22 listed property developers posted more than Rmb2.92 trillion in contracted sales last year, up 53% from 2016.
Some concentration within the industry has already taken place. Hence, the country’s top-10 developers accounted for 43% of the $596 billion land sales posted last year, up from 23% in 2008, according to Real Capital Analytics, a global property industry consultant.
“Clearly the big developers have the most financial power to drive an industry consolidation,” London-based Petra Blazkova, a senior director at Real Capital Analytics, said.
Stanley Ching, a managing partner at Citic Capital, said China's bigger property companies, those with at least Rmb100 billion of contracted sales, should have more of a chance to take over smaller companies and secure funding for future developments.
The large developers, in theory, can get funding more efficiently and cheaply than the small companies, because mainland investors think the central government would not let large company to fail due to concerns about social stability and their importance to fiscal revenue of local government.
After a recent meeting with the Chinese officials, Ching, a former HSBC banker, reckoned that the large developers would get a nod from the regulators to issue new shares or bonds to take over the smaller players.
“There is a huge refinancing risk among the small guys,” said Ching, who has more than 30 years of industry experience. “The government also stressed the duration risk –the tenure of a wealth management product should match with the property project.”
“As there will be over Rmb1 trillion of wealth management products due to repay this year and next year, I am worried about how many of these short-term product will get refinanced,” said Ching.
A raft of policy tightening measures aims to reduce sources of liquidity that has helped spur home prices to historic highs, but a rapid pace of grip could trigger a sharp drop in property prices as well.
“It’s in nobody’s interest to crash the property market,” said Ching.
