Chinese real estate developers’ cash flows have collapsed by more than 20%

Analysts generally expect state-owned companies to do better than non-state developers in the recent housing crisis. Pictured here in Guangxi, China, August 15, 2022 is a real estate complex developed by state-owned conglomerate Poly Group.

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BEIJING – Chinese property developers’ cash flows – a sign of the companies’ ability to stay afloat – have contracted this year after steady growth over the past decade, according to Oxford Economics.

Developer cash flows through July are down 24% year over year on a yearly basis, according to analysis by the company’s chief economist Tommy Wu.

That’s a sharp slowdown in growth almost every year since at least 2009, the data showed. Total funding was 15.22 trillion yuan (US$2.27 trillion) in July on an annualized basis, up from 20.11 trillion yuan in 2021.

The decline comes as credit demand in China missed expectations in July and real estate developers continue to struggle.

About two years ago, Beijing began cracking down on developers’ high reliance on debt for growth. Remarkably, Evergrande defaulted late last year. Other developers like Shimao have also defaulted despite seemingly having healthier balance sheets.

While investors have become more cautious about Chinese real estate companies, developers now face the risk of losing another important source of cash flow: homebuyer prepayments.

Houses in China are usually sold before completion. But since late June, some homebuyers have protested delays in home construction by halting mortgage payments.

“The crux of the problem is that real estate developers don’t have enough cash flow — whether because of debt servicing costs, low home sales or misuse of funds — to proceed with projects,” Wu said in a report last week.

“Resolving this issue will restore home buyers’ confidence in developers, which will help support home sales and, in turn, improve the financial health of developers.”

More than $2 billion in high-yield real estate developer debt is due in September — more than double what it was in August, according to Morgan Stanley’s Aug. 10 analysis.

About a quarter of homebuyers who bought homes before they were completed tend to stop making mortgage payments if construction is suspended, the U.S. investment bank said in an Aug. 15 report, citing a proprietary AlphaWise consumer survey.

Not only does real estate account for the majority of household wealth in China, but analysts estimate that real estate and real estate-related industries account for more than a quarter of China’s GDP. The housing slump has contributed to a general slowdown in economic growth this year.

To support growth, the People’s Bank of China cut interest rates, including one unexpected cut on Monday from 10 basis points to some one-year interest rates for institutions, known as the medium-term lending facility.

While the PBOC may hope the cut could ease some of the burdens on homebuyers and help developers get credit, the problem isn’t just funding, said Bruce Pang, JLL’s chief economist and research director for Greater China.

He pointed out that developers had found it harder to obtain financing themselves and had to rely more on pre-sales to homebuyers. But people are increasingly cautious about buying new homes because of their expectations of future employment and returns on existing investment products, he added.

Despite several reports of government plans to continue funding developers, the central government has yet to officially announce broader support for real estate. A message from a high-level government meeting last month said Local governments are responsible for the delivery of finished houses.

According to Wu’s analysis, among the top three sources of developer funding, prepayments and deposits have declined the most this year, down 34%.

Lending as a source of funding fell 22%, while self-raised capital, including stocks and bonds, fell 17%, annualized data showed.

Investors are turning away from China real estate

Mutual funds have largely stayed away from Chinese real estate developers, reducing a potential source of funding.

“What was worrying was the lack of willingness and speed on the part of senior policymakers in solving real estate developers’ funding problems,” Carol Lye, associate portfolio manager at Brandywine Global, said in an email reply to CNBC.

Lye said the investment manager’s allocation to Chinese real estate is small and that Brandywine holds “quality real estate bonds that have been favored in terms of government support.”

Some investors have even reached out to companies in other parts of Asia.

“We have divested almost all of our holdings in Chinese residential real estate. It’s more of a wait and see game when it comes to regaining exposure,” said Xin Yan Low, Asian property equity portfolio manager at Janus Henderson in Singapore. She declined to share a timeline for those sales.

“There are still many alternatives in the region, especially with reopening now, Singapore, Australia basically back to full reopening, fundamentals are strong,” she said.

Top holdings co-managed in it Horizon Asia-Pacific Property Income Fund include Japan Metropolitan Fund Invest, Mapletree Logistics Trust and Hang Lung Properties.

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That’s what Morningstar’s Patrick Ge said in a report this month some funds have moved away from Chinese real estate and into other high yield sectors in Asiasuch as Indian renewable energy companies and Indonesian real estate.

Overall, the report said money invested in Chinese real estate mutual funds fell by 59% in six months.

But the report says investment giant BlackRock is among the firms buying Chinese real estate bonds — including Shimao’s.

The wealth manager did not respond to a CNBC request for comment.

– CNBC’s Michael Bloom contributed to this report.

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