As the rout of Chinese equities begins to grab world headlines, the stocks of the country’s property developers appear to be leading the way down, with the Shanghai real estate index heading southward today by 438 points, a loss of 6.86 percent.
The fall in the share prices of some of China’s largest property developers outpaced the broader Shanghai composite index which dropped by 5.90 percent, and followed nearly three weeks of losses in which the property index has slid by more than 35 percent.
With the equity fallout spreading to Chinese developers listed on the Hong Kong exchange this week, and many of China’s real estate companies still struggling to rebuild their balance sheets after a year-long property slowdown, the share crash raises questions about where the country’s developers will turn next for the cash needed to run their businesses.
Developer Shares Fall Despite Government Countermeasures
Where the Chinese government appears to have been successful in first taming the housing bubble and then preventing a hard landing for home prices, it has so far failed to prevent the precipitous drop in share prices, including for the country’s developers.
Even blue chip Chinese-listed developers such as Gemdale fell by close to 10 percent today, and Poly Real Estate, a top five Chinese home builder on the Shanghai exchange, fell by over nine percent today and has now lost over 30 percent of its share value in the last 30 days.
The share price slide on the mainland came despite a new round of administrative aid from Chinese authorities on Wednesday, including regulators announcing that Chinese insurers would be allowed to buy more blue chip stocks, and state run firms would be forbidden from selling their share holdings. The China Securities Regulatory Commission also announced today that the China Securities Finance Corp would increase purchases of small cap stocks.
Despite these moves, mainland shares continued to fall and neither have Chinese developers listed in Hong Kong been spared this latest round of investor skepticism. Top five mainland home builder China Overseas Land & Investment fell by more than 10 percent today in Hong Kong, and is now down more than 22 percent in the last month.
China Vanke, the nation’s second largest developer by sales was also down by more than five percent today, despite a pledge earlier this week to defend its share price by buying back its own stock. Greentown Holdings and Guangzhou R&F, both top Chinese developers were also both down more than nine percent today in Hong Kong.
Overall in Hong Kong, the Hang Seng China Enterprises Index, which measures the value of Chinese companies listed in Hong Kong, was down by over six percent today and has slid by more than 21 percent in the last 30 days.
Bad News for Balance Sheets
The slide in share prices is bad news for many Chinese developers, most of whom are still struggling with tight cash flow following last year’s housing slowdown. While prices have begun to recover in the last few months, many of these developers still have mountains of debt to resolve and are sitting on record inventories of unsold homes.
For a time, the 150 percent surge in share prices on China’s stock exchanges over the last year, and a parallel but less dramatic rise in prices for Chinese companies listed in Hong Kong, had promised relief for developers looking for balance sheet first aid.
Developers such as Country Garden, which raised $813 million in a share sale in April, and other companies including China Resources Land, Guangzhou Evergrande, and Greenland Hong Kong took advantage of the high share prices to raise a total of nearly $3 billion through share offerings in the second quarter.
Commercial developer Dalian Wanda even set out plans as recently as last week for a RMB 12 billion ($1.9 billion) mainland share sale later this year.
While it’s possible that the mainland share market could still rebound the fall over the last few weeks of the Hang Seng Index, which measures stocks listed on the Hong Kong exchange, has now wiped out all of its gains from earlier in the year. On the mainland, the Shanghai composite has now given back 47 percent of the gains that it made in the last 12 months.
International Investors Shunning Developer Debt
The question for China’s developers that wish to continue operating is where to turn for capital.
International bond markets which had welcomed mainland developer bond issues in 2013 and 2014 after Chinese banks grew leery of making more loans to the industry, may still be too spooked by the Kaisa default early this year to provide the kind of capital needed at the prices that developers can bear.
There were also signs today that the panic that surrounds Chinese shares is spreading to the bond markets, as the yield on China’s benchmark one-year government bond rose 0.3 percentage point to 2.32 percent.
Prices for Chinese bonds in general fell on international markets today, but developer debt was among the worst hit. Speaking of the performance of international bonds issued by Chinese companies Frank Huang, fixed-income trade at SinoPac Securities told the Wall Street Journal today that, “Property developers are some of the biggest casualties.”
In general the prices of Chinese high yield bonds began falling in mid-June, and have followed mainland share prices downward.
Onshore Bonds Could Be Next Up
With the Chinese government always eager to maintain the health of the property sector, which is said to make up 15 percent of the country’s GDP, the new avenue for developer capital just might be domestically issued bonds.
Earlier this week, Evergrande Real Estate, one of the country’s most indebted developers was able to raise RMB 15 billion ($2.4 billion) through an onshore bond issue, and Beijing-based Longfor Properties raised RMB 2 billion ($322 million) through its own debt sale.
Evergrande was able to price its offering at the relatively low interest rates of 5.3 percent for a set of four year bonds and 6.98 percent for a set of seven year bonds, due to mainland investors willingness to view corporate bonds, even for indebted firms such as Evergrande, as virtually risk-free securities.
Other developers such as Country Garden Holdings have indicated that they may follow the lead of Greenland Group and Dalian Wanda in selling investment products directly to mainland consumers on the Internet. The Guangzhou-based developer announced over a month ago that it would turn to crowdfunding for a residential project in Shanghai.
But Country Garden is also planning its own RMB 6 billion ($966 million) domestic bond sale and has already applied for formal approval for the issue. CIFI Holdings and Powerlong Real Estate, two other Hong Kong-listed mainland developers are said to be planning similar bond issues.
Evergrande, which is listed in Hong Kong, was the first overseas listed developer to win approval for a mainland share issue, without having a mainland listed entity, in several years, signalling that Chinese regulatory authorities may be willing to shape their policies to meet the needs of the market, or at least of leading enterprises.