Tables Turn Quickly on Chinese Developers
After Buying Up Land,
Firms Can't Raise
Enough Cash to Build
By JONATHAN CHENG
March 26, 2008; Page C10; Wall Street Journal
HONG KONG -- Just six months ago, Chinese property developers were on a shopping spree, dipping deep and borrowing heavily to snap up more, and more expensive, pieces of land.
How quickly things have changed.
Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.
Companies that leveraged big last year are now strapped for cash, unable to build on the land they have accumulated. Beijing is breathing down their necks, having pledged earlier this year to tax and seize hoarded land.
"The swagger is gone," says Ashley Howlett, a Beijing property lawyer with Jones Day who heads the firm's greater-China construction practice. In recent months, he says, Chinese clients have been approaching him for ideas on alternative sources of funding, such as forming a private-equity joint venture with a global property fund or taking out a line of credit with a foreign bank.
The latest casualty of changed conditions: Guangzhou-based developer Evergrande Real Estate Group, which last week shelved an initial public offering it hoped would raise as much as $2.2 billion. Evergrande, owned by Xu Jiayin, cited "continuing volatility" in capital markets.
Evergrande's woes illustrate many of the headwinds facing Chinese developers. Despite stock-market turmoil, the developer was so weighed down by debt it had no choice but to take a crack at an IPO: More than half the funds Evergrande was hoping to raise were set aside to pay for plots it accumulated during a furious land grab last year.
"We are highly leveraged, and a deterioration of our cash-flow position could materially adversely affect our ability to service our indebtedness and to continue our operations," Evergrande wrote in its listing prospectus. With the IPO shelved, the company hasn't said how it will seek funds.
Even titans have had to trim their ambitions. Country Garden Holdings, the largest Chinese property developer by market capitalization on Hong Kong's exchange, canceled a $1.5 billion debt issue late last year before resuscitating it in January -- though only at a third of the size, and restructured as a far more expensive convertible bond.
Soho China Ltd., a major commercial and residential developer in Beijing, recently dropped the idea of doing a domestic stock listing amid souring market conditions. Pan Shiyi, the company's co-founder and chairman, told Shanghai Securities News that Chinese developers this year will "find themselves in extraordinarily difficult financial straits."
Fueled by buoyant capital markets and soaring property prices, developers went on a land-buying binge last year. "The 'model' that worked in 2007 was predicated on prices for apartments growing faster than land costs," says Todd Schubert, an analyst with Deutsche Bank in Singapore.
Companies that bought land aggressively were rewarded by investors, which only encouraged developers to keep increasing land banks, no matter how high the cost spiraled. Now, with home prices faltering and funding sources scarce, Mr. Schubert says, "This game is over."
Overextended and overleveraged developers are struggling to find construction funds. "Having a lot of land in some ways becomes an albatross around your neck," says Mr. Howlett of Jones Day.
Months ago, they might have gone to the capital markets. Mainland property companies raised $7.6 billion in Hong Kong listings in 2007 -- seven times the 2006 total, according to Thomson Financial. Chinese regulators seem willing to allow mainland property concerns to sell shares, but as stock prices continue to plummet, poor investor sentiment can put those plans in jeopardy, along with IPO ambitions in other sectors. Meanwhile, the market for offshore U.S. dollar debt is moribund.
These developers are also facing the prospect of a turning point in China's broader property market, especially in the south, a stronghold for many of the biggest developers. In the past few months, Wang Shi, the head of megadeveloper China Vanke, a Shenzhen-listed company based in that boomtown, surprised the market by slashing prices heavily on new flats and suggesting in a recent television interview that people wait three to four years before purchasing a new home.
The government made home buying more expensive last year by raising down-payment rates on second mortgages and raising mortgage rates, in order to cool prices. It also is rolling out low-income housing that could further depress prices.
Kong Qingping, chairman of Hong Kong-listed China Overseas Land & Investment, acknowledged last week that this confluence of trends would make the year ahead difficult for Chinese developers. He described price declines of as much as 30% in some top-tier cities as simply a "return to rationality" after several years of overexcitement, not a "turning point," as Mr. Wang of China Vanke has it.
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