Chinese developers need wider source of debt funding – report

China’s real estate markets are betraying liquidity concerns as sales volumes decrease and operations are delayed.

China’s real estate developers sold as much as 200,000 square metres of residential units per day last year but this year’s sales, as of 12 March, were down by 27 percent from normal levels, according a PwC report.

The report, Succeeding in Uncertainty: Financing China’s Real Estate, shows that the covid-19 pandemic has forced closure of construction sites and sales centres across China, putting additional pressure on developers’ liquidity.

The Chinese State Council has encouraged a return to normal business operations this month and announced a plan to ask provinces to check the progress of production resumption. Many factories stopped production, and as many as 51 million people in 16 cities, including Wuhan, Jingzhou and Suizhou, were under lockdown during January and February due to the coronavirus outbreak.

Data from PwC show that developers mainly finance their operations from two sources: earnings from contracts, such as pre-sales, and onshore borrowings. The latest figures representing sales volume and the breakdown of borrowers’ funding sources imply sector-wide liquidity pressure.

The primary residential unit sales volume for 10 major Chinese cities, including Beijing, Shanghai, Guangzhou and Shenzhen, was 27 percent down on the same time in 2019 as of 12 March, according to Wind, a data provider on Chinese financial markets, and PwC.

Industry observers say real estate development companies should look to various funding sources other than onshore loans and bonds to sustain their businesses.

PwC estimates Chinese real estate developers’ offshore bond issuance for 2019 would have been as much as $75 billion, compared with 2018’s actual issuance of $53 billion.

Among the rated Chinese developers that have access to offshore debt funding channels, Languang Development and Zensun Group are experiencing the need for diversified funding channels outside onshore borrowing from trusts and asset management vehicles, according to Moody’s.

Languang Development borrowed as much as 29 percent out of its total reported debt via trusts and asset management vehicles as of 30 September, 2019. “These borrowings usually bear higher interest rates and are associated with higher refinancing uncertainties than bonds or bank loans,” added a lead analyst at Moody’s in the corporate family-level credit report issued on 3 February.

Others have also noted the liquidity stress signal from the real estate sector in China. CBRE’s Asia Pacific Cap Rate Survey Q4 2019, issued on 11 February, remarked that refinancing pressure and a slowdown in residential sales will prompt highly leveraged Chinese developers to dispose of non-core assets to generate capital.

However, the real estate sector’s liquidity pressure may bring more investment opportunities for private debt investors, the PwC report said. Although sourcing deals from China will remain as a challenge due to coronavirus travel restrictions, it expects to see more than $2 billion of capital deployment from foreign private funds in the next 12 months.