China real estate: A hibernating grey rhino waking up to global risk aversion

• China’s property market has gone into hibernation after the coronavirus outbreak but it is waking up in the light of worsened market condition. While home transactions normally start to pick up after the Lunar New Year, the situation is different this year with volume reduced by 76%. For real estate developers, the grey rhinos in China, an important question is whether they could sleep through the crisis without liquidity risk when the world is increasingly risk-averse. Although slower sales growth is posing additional challenge to the already weak repayment ability of property developers, the virus outbreak has intensified challenges on funding from customers, bonds and loans.
• Since 2015, Chinese property developers have become more reliant on funding from customers through pre-sales, meaning any related disruption will have tougher negative impact than the past. The delayed sales and pre-sales could pose liquidity risks given the high leverage and reliance on short-term financing.
• For the financial channels, Chinese property developers are key offshore high yield bond issuers in Hong Kong and there is an existing maturity wall in March 2020. Condition is calmer in the onshore market but state-owned enterprises and financial institutions are crowding out the room for real estate developers to issue bonds. The spread between state-owned and private enterprises have widened, which does not bode well for property developers as it is one of the sectors with largest private ownership. While the general yields for real estate developers have still remained calm, the offshore yield for private ones has already edged up. Access to banks loans may also be limited as the government focuses on small and medium enterprises (SMEs), which have been severely affected by the production halt. Therefore, real estate developers may be squeezed for all major funding channels.
• Within this context, the impact for each province may vary. Jiangsu is the most affected due to the higher share of land purchases, investment and new started floor space at the beginning of the year, and to a lesser extent Shanghai. Hainan is heavily reliant on sales at the beginning of the year. Sichuan and Chongqing are also more dependent in January and February from the range of indicators.
• All in all, the risk embedded in real estate developers with a highly leveraged and short-term debt structure will hinge on government policies in the balance between short term growth and affordability under the motto of "houses are used for living, not for speculation".

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