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China is putting market-oriented solutions for its troubled collection of property developers into practice — even in a market frozen by fear.
Industry consolidation has always been Beijing’s preferred remedy for a liquidity crisis. In recent years, we witnessed a wave of regional bank mergers, with bureaucrats maneuvering behind the scenes to avoid stirring panic and bank runs. We are seeing that approach echoed with indebted real estate developers too. It’s “the most effective market-oriented meansâ€, said a People’s Bank of China official at a media briefing late December, even as the biggest builders from China Evergrande Group to Kaisa Group Holdings
defaulted on their dollar notes.
In recent days, state-owned enterprises have begun to cherry pick prized assets off distressed developers. The most eye-popping deal came from Shimao Group Holdings, which until November still boasted an investment-grade rating at S&P Global Ratings. The developer sold a plot of land in Shanghai for 1 billion yuan, 23% lower than the asking price, according to local financial publication, The Paper.
The trades may buy some time, but it’s not a viable solution for an industry plagued with soaring fixed costs. Even as apartment purchases slow dramatically, developers still have a lot of monthly bills to pay.
Take Shimao. Its contracted sales have collapsed, with the December number down 70% from a year ago. But since pre-sales remain the dominant business model, developers can’t just stop a project when sentiment turns sour. As long as Shimao has sold a few units, it has to deliver the entire complex. As of June, contract liabilities, which include deposits owed to apartment buyers, stood at 113 billion yuan, or about one-quarter of Shimao’s total liabilities.
There’s also the debt. Shimao pays more than 8 billion yuan per year in interest expense alone. In addition, as of June, the latest financials available, it had 78 billion yuan of borrowings due within a year — total revenue in the year ended June 2021 was 144 billion yuan. And these are just numbers on the books. According to UBS Group AG, Shimao has another 120 billion yuan in off-balance sheet debt, accrued mostly through aggressive land acquisitions between 2017 and 2019. We have no idea when the hidden debt is due, or how much is due.
Shimao’s land sale has got financial media excited. According to local news reports, its Shanghai projects could fetch as much as 12.9 billion yuan, and it was in talks to sell a 26.7% stake in the Guangzhou Asian Games City project, which could be worth another 1.8 billion yuan.
Industry M&A can still help distressed developers, but only when state enterprises are willing to take a stake in the parent company. Only then can market confidence be restored.
—Bloomberg