Debt piles add to risk for Chinas property groups Page 1 of 8

Evergrande Real Estate Group

Debt piles add to risk for Chinas property groups

AFP

3 HOURS AGO by: Yuan Yang in Beijing and Jennifer Hughes in Hong Kong

When Li Keqiang, Chinas premier, told the National Peoples Congress this
month that the government was worried about high leverage in non-financial
Chinese firms, finance directors of the countrys property developers must have
winced.

Balanced between their reliance on ballooning debt markets

(http://next.ft.com/content/8de1a56a-022c-11e7-ace0-1ce02ef0def9), which
Beijing wants to bring under control, and a housing boom
(http://next.ft.com/content/ad0b557e-9a82-11e6-8f9b-70e3cabccfae) that
authorities want to cool, developers have defied predictions of collapse for years.

Even now, few analysts are predicting disaster but they say high leverage is a
rising risk as margins come under pressure.

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Debt piles add to risk for Chinas property groups Page 2 of 8

Chinas more heavily indebted developers are living on a knifes edge, says
Andrew Collier, managing director of Orient Capital Research, an investment
research group in Hong Kong.

Real estate developers are facing a funding squeeze just as they are entering
their first downturn in three years (http://next.ft.com/content/fab25e94-ad6a-
11e6-9cb3-bb8207902122). House prices rose 40 per cent in big cities last year
but have stalled in 2017. Single-digit price declines are expected
(http://next.ft.com/content/db6f0442-f9b9-11e6-bd4e-68d53499ed71) this
year and sales revenues for the bigger developers could fall by as much as 10 per
cent, according to S&P Global Ratings, as transaction volumes decline. Last
year, revenues rose 20 per cent.

Chinas big developers stand out compared to their peers worldwide for being
highly leveraged, thanks to their access to local banks and capital markets, says
Wang Xinling, lead analyst at China Policy, a think-tank in Beijing.

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Debt piles add to risk for Chinas property groups Page 3 of 8

On top of a slowing market, many funding sources favoured by property

companies (http://next.ft.com/content/2dba9b48-fc9f-11e6-8d8e-
a5e3738f9ae4) are coming under threat. Beijing began restricting funding last
October, ordering regulators to limit equity and bond sales by developers as part
of efforts to rein in the property market.

Authorities have also clamped down on the inclusion of property loans in wealth
management products, which had in effect allowed banks to keep a portion of
their lending off the books. The ability to tap WMPs had become a key source of
capital for developers, according to several analysts.

We believe the funding restriction will weaken Chinese property developers

access to alternative financing and increase their cash flow burden, says Cindy
Huang, credit analyst at S&P Global Ratings.

Evergrande (http://markets.ft.com/data/equities/tearsheet/summary?
s=hk:3333), Chinas second-biggest property group by sales, is the most
leveraged among mainland and Hong Kong-listed developers, according to data
from Wind Information. Its net debt was 605 per cent of its equity as of June
2016, versus the sector average of 90.

Evergrande is the poster child for the wackiness of the Chinese property
market, where property is an asset to be held rather than something to live in,
says Anne Stevenson-Yang, director of research at J Capital Research.

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Debt piles add to risk for Chinas property groups Page 4 of 8

The developers borrowings increased almost 50 per cent in the second half of
last year to Rmb565bn ($82bn), according to a company filing last month.

Yet the company has repeatedly refinanced debt in previous years from banks
and bond investors emboldened, say JPMorgan analysts, by a perception that
Evergrande is too big to fail.

Greenland Holdings, number four last year in terms of property sales, has
similarly heavy debts. Its net debt to equity ratio was almost 300 per cent at the
end of September, according to estimates by Huachuang Securities, an
investment group. As of the end of June, it held net debt of Rmb185bn.

State-owned status is an added benefit that has given Greenland privileged

access to loans in return for partnering with the government for infrastructure
projects.

The property sector is the foundation for Chinas economy, says Jonas Short,
head of NSBO China, a policy research group in Beijing.

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Debt piles add to risk for Chinas property groups Page 5 of 8

Close links between corporate and state interests have tempted investors to
consider big property groups as sure-fire investments, no matter the scale of
their debt or asset quality.

Foreign investors look at these companies and think their bond yields are
relatively high, and they must be backed by the government, so why not buy?
says J Capitals Ms Stevenson-Yang.

Developers are also adept at avoiding writedowns on assets, often halting sales
when prices begin to slip to preserve their valuations, adds Ms Stevenson-Yang.

Another tactic is to classify empty buildings as investment properties rather

than inventory, which is marked at market prices. GMT Research, an accounting
research group, said it visited 40 Evergrande developments and found that
much of the companys investment properties were empty hotels and shop
fronts or abandoned parking lots.

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Debt piles add to risk for Chinas property groups Page 6 of 8

In China its not unusual for large development sites to take five to 10 years to
be fully sold, says Su Aik Lim, senior director at Fitch Ratings. The question is
whether they will be fully sold.

Yet so far there are few signs of acute financing strain among the biggest
developers. Even as local bond markets closed, many property groups have this
year tapped international markets, where appetite for their high-yielding paper
remains robust.

Last week Evergrande attracted bids worth $5.4bn for the sale of $1.5bn in
bonds.

A lot of people have made money from buying these bonds at the bottom and
there are real assets behind them, too, says one China debt banker. People feel
like theyve seen the worst and these guys are the survivors.

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Debt piles add to risk for Chinas property groups Page 7 of 8

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