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Monday 6 June 2011
China developers to write down asset values
Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.
Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.
Most at risk are those mainland Chinese and Hong Kong developers who added aggressively to their land banks in 2009 and 2010, the prices of which could come under pressure amid Beijing’s ongoing credit tightening, the investment bank said.
The findings were part of a poll of both listed and unlisted companies conducted by an independent research company and commissioned by Credit Suisse.
Among concerns are the potential impact on smaller developers, many of which don’t have the financial resources to weather leaner times.
“The potential exodus of small developers could be overwhelming, and result in a surge in land supply that may bring down land prices further,” said Credit Suisse’s Hong Kong-based analysts.
Prices for land sold at auction were down 20% so far this year, the report cited one industry expert as saying. Other data indicated price declines of up to 50% for the year to date, although the figures were affected by slumping transaction volumes in cities such as Beijing, possibly overstating the true rate of declines, the report said.
Meanwhile, the tighter credit conditions are having a “double impact” upon developers, Credit Suisse said.
On one hand, delays in mortgage approvals mean developers are having to wait longer to get paid than they did in earlier times. Today’s leaner environment has also resulted in a rise in buyers backing out of purchasing commitments on new projects because they can’t secure financing.
In response to the government’s austerity measures, unlisted developers have had to turn to private loans and trust loans, requiring annual interest rates of up 20%, according to Credit Suisse.
Another worrying trend cited by the analysts involves a rise in disputes between developers and construction companies over late payments, although they added that the delays were not considered widespread.
The survey found construction companies see things getting worse in the months ahead. Many of these companies expect to receive more requests to slow down the pace of their work, reversing conditions previously when developers had pressured them to speed up.
In China, construction companies often fund the building and material costs and then get paid in phases as the project nears completion.
In a sign of the times, many construction companies are allocating more resources to chase up overdue accounts, filing lawsuits or even considering halting work on projects where they are sceptical contracts will be honoured, Credit Suisse said.
Hedge-fund manager Robert Howe of Hong Kong-based Geomatrix said there are ”bubble aspects” to China’s housing market, citing data that apartment prices in Beijing and Shanghai were unaffordable for about 80% of the local population.
He said many Chinese investors had bought second homes as a store of value, content to leave the homes vacant as part of a long-term investment or as a future home for their children. Still, he see a correction rather a big downward spiral in prices.
“There’s not the leverage in the system that there was in say, the U.S. ... It’s less dangerous,” Howe said.
Meanwhile, Credit Suisse said it was sceptical of the argument that rising wages would provide much support to the housing market.
For the most part, wages are rising quickly for low-income earners, but because their pay is so low, the improvements won’t translate into purchasing power in a big way, Credit Suisse said.
Middle class households — those with income of 8,000 yuan ($1,234) per month or more — can expect around a 3% wage hike this year, or less than the rate of inflation, Credit Suisse said.
Moreover, down-payment requirements are expected to rise to 50% from 30% currently for first-home buyers, while second-home buyers will be required to front up 70% of the purchase price, up from 50% currently.
The changes would mean first-home buyers would need to save up 33 years for the purchase, while second-home buyers would need to save for 47 years, according to Credit Suisse estimates.
Credit Suisse said it advised investors to underweight the Chinese property sector, but was more upbeat on mass-market-focused firms, including China Vanke Co., which is listed in Shenzhen, and the Hong Kong-listed Evergrande Real Estate Group.
It said that official statistics likely understate the true scale of wealth inside China, though much of this shadowy wealth is controlled by the rich and doesn’t factor into housing affordability for the masses, Credit Suisse said.
2 comments:
China developers to write down asset values
By Chris Oliver, MarketWatch
31 May 2011
Falling land prices may prompt Chinese property developers to write down the value of their assets, forcing a sober reassessment for those with vast land holdings, according to a survey released Monday by Credit Suisse.
Most at risk are those mainland Chinese and Hong Kong developers who added aggressively to their land banks in 2009 and 2010, the prices of which could come under pressure amid Beijing’s ongoing credit tightening, the investment bank said.
The findings were part of a poll of both listed and unlisted companies conducted by an independent research company and commissioned by Credit Suisse.
Among concerns are the potential impact on smaller developers, many of which don’t have the financial resources to weather leaner times.
“The potential exodus of small developers could be overwhelming, and result in a surge in land supply that may bring down land prices further,” said Credit Suisse’s Hong Kong-based analysts.
Prices for land sold at auction were down 20% so far this year, the report cited one industry expert as saying. Other data indicated price declines of up to 50% for the year to date, although the figures were affected by slumping transaction volumes in cities such as Beijing, possibly overstating the true rate of declines, the report said.
Meanwhile, the tighter credit conditions are having a “double impact” upon developers, Credit Suisse said.
On one hand, delays in mortgage approvals mean developers are having to wait longer to get paid than they did in earlier times. Today’s leaner environment has also resulted in a rise in buyers backing out of purchasing commitments on new projects because they can’t secure financing.
In response to the government’s austerity measures, unlisted developers have had to turn to private loans and trust loans, requiring annual interest rates of up 20%, according to Credit Suisse.
Another worrying trend cited by the analysts involves a rise in disputes between developers and construction companies over late payments, although they added that the delays were not considered widespread.
The survey found construction companies see things getting worse in the months ahead. Many of these companies expect to receive more requests to slow down the pace of their work, reversing conditions previously when developers had pressured them to speed up.
In China, construction companies often fund the building and material costs and then get paid in phases as the project nears completion.
In a sign of the times, many construction companies are allocating more resources to chase up overdue accounts, filing lawsuits or even considering halting work on projects where they are sceptical contracts will be honoured, Credit Suisse said.
Hedge-fund manager Robert Howe of Hong Kong-based Geomatrix said there are ”bubble aspects” to China’s housing market, citing data that apartment prices in Beijing and Shanghai were unaffordable for about 80% of the local population.
He said many Chinese investors had bought second homes as a store of value, content to leave the homes vacant as part of a long-term investment or as a future home for their children. Still, he see a correction rather a big downward spiral in prices.
“There’s not the leverage in the system that there was in say, the U.S. ... It’s less dangerous,” Howe said.
Wages might not help
Meanwhile, Credit Suisse said it was sceptical of the argument that rising wages would provide much support to the housing market.
For the most part, wages are rising quickly for low-income earners, but because their pay is so low, the improvements won’t translate into purchasing power in a big way, Credit Suisse said.
Middle class households — those with income of 8,000 yuan ($1,234) per month or more — can expect around a 3% wage hike this year, or less than the rate of inflation, Credit Suisse said.
Moreover, down-payment requirements are expected to rise to 50% from 30% currently for first-home buyers, while second-home buyers will be required to front up 70% of the purchase price, up from 50% currently.
The changes would mean first-home buyers would need to save up 33 years for the purchase, while second-home buyers would need to save for 47 years, according to Credit Suisse estimates.
Credit Suisse said it advised investors to underweight the Chinese property sector, but was more upbeat on mass-market-focused firms, including China Vanke Co., which is listed in Shenzhen, and the Hong Kong-listed Evergrande Real Estate Group.
It said that official statistics likely understate the true scale of wealth inside China, though much of this shadowy wealth is controlled by the rich and doesn’t factor into housing affordability for the masses, Credit Suisse said.
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