Crunch looms for China's real estate developers

Developers have accumulated a mountain of debt in recent years, and with $85 billion in bond repayments due in coming months, many companies are likely to face restructuring as banking regulators look set to impose strict rules on debt levels

Crunch looms for China's real estate developers
The property sector has survived the economic impact of the coronavirus epidemic so far, but the months ahead could see many developers forced to take drastic action to survive when banking regulators intervene in a sector notorious for its heavy debt load. File photo by AFP.

(ATF) Real estate developers in China appear set to face a tougher stance from regulators, who fear severe financial repercussions from the huge mountain of debt they have accumulated. Some 588.8 billion yuan ($85.2 billion) in bond payments are due to be paid by real estate developers in the last four months of this year.

Leaks to the media in Beijing have claimed the China Banking and Insurance Regulatory Commission (CBIRC) will issue "three red lines" for real estate developers, because of concern over the industry's escalating debt in remainder of 2020.

According to China Business News, and various industry sources, an announcement on new rules is expected soon from the CBIRC. There is speculation that the leaks were designed to give real estate developers time to prepare to resolve their financial woes.

In order to control the scale of real estate businesses' interest-bearing debts , the rules are as follows: Red line number one is if a developer's asset-liability ratio, after excluding advance receipts, is greater than 70%; red line number two is if a developer's net debt ratio is greater than 100%; and red line three is if a company's short-term debt ratio in cash is low. These rules will be implemented by "relative departments", qq.com news reported.

News about the tightening of regulations in regard to real estate financing was leaked to China Business News by ‘a source in a top 20 real estate developer.’ Another source in a top real estate developer said that the company had yet to receive official documents, but said these “rumours have been fermenting.”

This state of high dungeon and tension is due to worries about the debt repayments that real estate developers, which are due to hit a peak in coming months, as the maturity of domestic and overseas financed bonds owed by Chinese developers is at least 558.8 billion yuan, which is a year-on-year increase of 58%.

'Many big developers in trouble'

According to an analysis by Tianfeng Securities, there are 14 real estate companies  among the top 50, based on domestic sales, which cross at least one red line, and to of them exceed two of these requirements.

This suggests there could be wholesale restructuring enforced by officials in this debt-heavy sector.

Pan Hao, a senior analyst at the Shell Research Institute, told China Business News: "The three indicators measure corporate financial risks from the overall, long-term and short-term dimensions, and aim to control the high leverage risk of real estate companies as a whole. They will have a profound impact on leading real-estate companies and small and medium-sized real estate companies, who have aggressively been acquiring land for expansion, and high turnover. The scale of impact will be high.”

The rules have not yet been announced by officials, but this explains why real estate developers remain tense.