2015-04-25

Borrowing Surge Points to Weakness in Real Estate

Chinese real estate data is improving in first-tier cities such as Beijing, see Beijing Real Estate Market: Activity Up More Than Prices and Beijing Real Estate Market Condition: Better, But Not Great. It is possible that March or April will mark the bottom for home prices. It may also be a false dawn similar to the small spikes in sales that followed policy easings throughout 2014.

A couple of things I saw on Friday make me think things may be deteriorating behind the scenes. First is the rapid increase in loans:

Loans to Chinese property developers surge again in Q1
Loans to Chinese property developers surged again in the first quarter despite the country's housing downturn, official data showed on Friday, a sign that authorities were exhorting banks to do more to support the cooling property market.

Banks' loans to property developers leapt 24.1 percent to 6.08 trillion yuan ($981.8 billion) by the end of March, central bank data showed, picking up from a rise of nearly 23 percent in the corresponding period last year.

Growth in loans to build public housing was even stronger. They shot up 64.3 percent in the first quarter to 1.28 trillion yuan, faster than last year's rise of 57 percent.
I read this and immediately thought of Kaisa and the steel sector.

Kaisa's debt load went from 35.2 billion yuan in July 2014 to 65 billion yuan today. About half of that debt is coming due in 2015. As debt was rising from July 2014, Kaisa's cash balance has gone the other way, collapsing 83%.

In addition to the ¥1.3 trillion in bank loans, much of it short term, the industry's top 80 firms also owe ¥1.7 trillion in short-term high interest loans. Firms are borrowing to repay old debt, for instance a Xinjian unit of Baosteel saw its short-term debt climb 13.3% last year, even as long-term debt fell 29%.
Debt piles up fastest at the end, when the only way to survive is to extend and pretend. Fake it until you make it, stay solvent until business conditions improve and then dig your way out of the hole. A rapid increase in debt can be a sign that the end is close at hand.

Another story out yesterday: Glorious Property Seen Close to Default After Kaisa Tumble
Attention has rapidly shifted to Glorious Property Holdings Ltd., whose controlling shareholder is billionaire Zhang Zhirong. Moody’s Investors Service cut its senior unsecured rating to Ca, just one step from the lowest grade typically signaling default, on April 20 citing sliding sales. It settled $19.5 million of interest Friday on its $300 million of 13 percent notes due Oct. 25, which have dropped 6.3 cents this month to trade at 78.4 cents on the dollar.

...Glorious, which according to its website focuses on developing large scale and high quality properties in cities in the Shanghai region, Yangtze River Delta and northeast China, had missed scheduled payments as of Dec. 31 on loans of 149.6 million yuan ($24 million) in principal and 46.4 million of interest, according to its annual results dated April 15.

Since the end of last year, the company also failed to meet repayment deadlines on 500 million yuan of principal and 397.3 million yuan interest on unspecified borrowings this year, it said, without giving further details. While the builder subsequently settled the bulk of the missed payments, it was still delinquent on 130.3 million yuan, it said.
Last year, Glorious sparked homeowner protests when it slashed prices in Jinan: Dozens of Police Keep Order As Jinan Homeowners Protest Price Cuts

Last year, there were no stop stories of firms at risk of bankruptcy. Even earlier this year, in February: Glorious Property Falls Into Debt Trap. In the Xinhua coverage linked in that post, one analyst report said 90% of developers (mainly small and medium firms) are already insolvent, but since the big firms are "too big to fail," the government will bail them out and the sector will avoid an economic chain reaction. The rapid increase in debt in the first quarter of 2015 fits perfectly with that report.

No comments:

Post a Comment