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China rate cut is cold comfort for struggling developers

12/01/2014 | 09:58pm EST
A worker operates at a construction site on the 68th storey of a building in Shenyang

HONG KONG/BEIJING (Reuters) - Property developers, among China's most heavily leveraged companies, will get a negligible lift from the country's first benchmark interest rate cut in two years as sales slip and banks pull back on lending to the sector.

After a long bull run, China's property market, which makes up about 15 percent of its economy and is the main driver of demand in some 40 industries from cement to steel, has grappled with soft prices and mounting inventories for at least six months.

    That prompted China's central bank to cut its benchmark lending rates by 40 basis points to 5.6 percent on Nov. 21, reversing in part its drive to cool a sector that many feared had become so bloated by speculative froth that it was crowding out other forms of investment.

But the lowering of the lending benchmark will bring only marginal relief to the sector's biggest headaches - too much unsold stock and tight liquidity.

"The fundamental problem of China's housing market is over-supply," said Ding Zuyu, co-president of real estate services firm E-House China (>> E-House (China) Holdings Limited (ADR)), and a few home buyers encouraged by the rate cut wouldn't change that.

New home prices in China dropped for a seventh consecutive month in November from the previous month, a survey by the China Real Estate Index System (CREIS) showed.

The force of the cut will also be enfeebled because bank lending to the property sector is in decline, having dropped 23.3 percent in the third quarter from the previous three months, Reuters calculations from central bank data showed.

    "The impact on property will be limited because for developers, funding access is more critical than borrowing cost," said Su Aik Lim, Fitch Ratings analyst.

"Even if interest cost falls, access to borrowing is poor, so weak developers still cannot avoid a liquidity crisis when their sales slow."

    Standard & Poor's said this week liquidity was a key risk for some developers, while forecasting a 5 percent fall in average selling prices in 2015.

Moody's expects residential property sales to shrink between 0 and 5 percent, too.

    All of which will make banks yet more wary about lending to the weaker players, which leaves them ever more reliant on their ability to keep generating cash.

    "The biggest most reliable source of funding is property sales; it is more important to boost sales than obtaining more construction loans," said David Ng, property analyst with Macquarie Securities.

    Larger players, such as Vanke (>> Vanke Property Overseas Ltd), Country Garden (>> Country Garden Holdings Company Limited), China Overseas (>> China Overseas Land & Investment Ltd.) and Shimao Property (>> Shimao Property Holdings Limited), have already been increasing their asset turnover in a bid to improve cash flows, taking market share from the smaller fry.

    Fitch estimates that the share of the top five developers, based on accumulated sales, has risen to 11 percent in September from 8 percent in end-2013, which also gives them bigger elbows in the scrum for financing.

    "Banks are lending to companies that can sell faster, so they get their money back quickly and renew their loans more comfortably," said Ng.

    That virtuous circle for the most successful becomes increasingly vicious for the strugglers as sales growth remains in the doldrums.

    "From the demand side – the rate cut will not stimulate demand sufficiently for cities that face oversupply," said Lim.

    He added that lower interest costs would be of only slim benefit to even the most indebted builders.

    "From the borrowers' perspective, interest expense accounts for only 5 percent of home selling price; the impact from a 40 bps cut will only cut interest expenses by about 6-7 percent, or around 0.3 percent of selling price."

It's a point not lost on apartment hunters like Li, a 37-year-old finance professional who would like a second home in Beijing.

"Compared with the huge amount for a housing downpayment, what's the use of the moderate rate cut?" she said.

(Editing by Will Waterman)

By Umesh Desai and Xiaoyi Shao


© Reuters 2014
Stocks mentioned in the article
ChangeLast1st jan.
CHINA FORTUNE LAND DEVELOPMENT CO., LTD. 0.56% 3.58 End-of-day quote.-0.56%
CHINA OVERSEAS LAND & INVESTMENT LIMITED -1.13% 21.85 End-of-day quote.18.36%
CHINA VANKE CO., LTD. 0.82% 20.87 End-of-day quote.5.62%
COUNTRY GARDEN HOLDINGS COMPANY LIMITED -8.14% 5.87 End-of-day quote.-15.17%
FUJIAN START GROUP CO.LTD -1.90% 3.1 End-of-day quote.2.65%
GEMDALE CORPORATION 3.53% 12.91 End-of-day quote.-0.46%
LAND CO., LTD. -9.09% 10 Delayed Quote.10.00%
LETS HOLDINGS GROUP CO., LTD. -3.43% 7.33 End-of-day quote.0.41%
METRO INC. 0.12% 66.85 Delayed Quote.-0.70%
METRO LAND CORPORATION LTD. -0.59% 5.08 End-of-day quote.-4.87%
POLY DEVELOPMENTS AND HOLDINGS GROUP CO., LTD. 2.81% 15.37 End-of-day quote.-1.66%
SHANGHAI LUJIAZUI FINANCE & TRADE ZONE DEVELOPMENT CO., LTD. 0.09% 10.9 End-of-day quote.0.37%
SHANGHAI STOCK EXCHANGE B SHARES INDEX -0.05% 287.0068 Real-time Quote.0.46%
SHIMAO GROUP HOLDINGS LIMITED -3.01% 4.83 End-of-day quote.-5.29%
TIANJIN SONGJIANG CO., LTD. 0.63% 3.19 End-of-day quote.1.27%
VANKE OVERSEAS INVESTMENT HOLDING COMPANY LIMITED 0.00% 2.4 End-of-day quote.3.00%
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Analyst Recommendations on CHINA VANKE CO., LTD.
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Financials
Sales 2021 472 B 74 229 M 74 229 M
Net income 2021 37 480 M 5 900 M 5 900 M
Net Debt 2021 76 033 M 11 970 M 11 970 M
P/E ratio 2021 6,32x
Yield 2021 5,28%
Capitalization 233 B 36 769 M 36 748 M
EV / Sales 2021 0,66x
EV / Sales 2022 0,60x
Nbr of Employees 140 565
Free-Float -
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China Vanke Co., Ltd. Technical Analysis Chart | 000002 | CNE0000000T2 | MarketScreener
Technical analysis trends CHINA VANKE CO., LTD.
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Mean consensus BUY
Number of Analysts 23
Last Close Price 20,87 CNY
Average target price 24,97 CNY
Spread / Average Target 19,6%
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Managers and Directors
Jiu Sheng Zhu President, CEO & Executive Director
Hui Hua Han Executive Vice President & Head-Finance
Liang Yu Chairman, President & Chief Executive Officer
Dong Xie Chairman-Supervisory Board
Xiao Liu Chief Operating Officer & Executive Vice President
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