Property developers cash-starved amid govt tightening

Updated: 2011-04-12 17:19
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BEIJING - Chinese property developers are suffering from a slump in cash flow amid government tightening measures meant to battle rising inflation and rein in speculation in the housing market, according to a report by a financial information provider.

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The free cash flow of the 84 property developers that had filed their annual reports for 2010 to the Shanghai Stock Exchange by Monday stood at negative 70.59 billion yuan ($10.79 billion), according to Wind Information, a Shanghai-based financial data provider, in a report on its website Tuesday.

The developers' free cash flow, referring to their operating cash flow after capital expenditure spending, came in sharp contrast to the 115 billion yuan of 2009, according to the report.

The figures came a week after China's central bank raised the benchmark interest rates by a quarter of a percentage point to 3.25 percent for one-year deposits, and 6.31 percent for one-year loans.

This is the fourth time in less than six months that China has raised interest rates in an attempt to battle the rising inflation weighing on consumers and businesses in the world's second largest economy.

The rate hike adds to six official increases in the bank reserve requirement ratio since October last year, bringing it to a record high of 20 percent.

In addition to monetary policies that have raised developers' borrowing costs, 35 major cities restrict residents from buying second or third homes, as well as some outright bans on buying second or third homes implemented in some cities. The measures also include higher down payment requirements for mortgages, and property taxes in Chongqing and Shanghai.

Developers feel the pinch of a tightened belt

Guangzhou R&F Properties, which targets home buyers in big cities, said in its first-quarter report that it had sold 27 percent fewer homes in area and 44.6 percent less in value year on year in the first three months of 2011.

"The cash flow for China's property developers will become tighter as most of them rely heavily on sales proceeds to service large land payments," said Zhuang Jian, a senior economist with the Asian Development Bank.

China Poly Real Estate Group, the country's second largest property developer by market value, saw its free cash flow fall to 22.37 billion, a 1854 percent year-on-year drop from 2009, according its 2010 annual report.

Other heavyweights such as China Vanke, the largest developer in China, and Beijing Capital Development, suffered from a drop of at least seven billion yuan in operating cash flow, the companies' annual reports showed.

Financing problems were also evident after some 20 developers announced in their reports that their dividends would be used to finance ongoing projects and replenish cash flow instead of going to investors in 2011.

In February, Rating agency Standard & Poor's revised the rating outlooks of developers Glorious Property Holdings, Kaisa Group Holdings and Renhe Commercial Holdings to negative because of their aggressive fund-raising overseas, Shanghai Securities News reported Tuesday.

Zhuang said this showed that measures to cool the overheated housing market were working, although no definite turning point was in sight.

"Property developers' financing has definitely turned tight, but it is too early to say the turning point of housing prices has come," he said.

Home prices in most major Chinese cities continued to rise month on month in February despite government efforts to cool the property market, according to the National Bureau of Statistics (NBS) last month.

Month-on-month price declines of new commercial homes were reported only in eight cities of the NBS' statistical pool of 70 major Chinese cities. Prices stood unchanged in six cities, while 56 other cities posted monthly price gains.

Major developers sell more homes

China Vanke said in its first-quarter report filed with the Shanghai Stock Exchange that it sold a total of 3.04 million square meters of new houses valued at 35.5 billion yuan, up 145 percent and 135 percent from the same period last year, respectively.

China's top three property developers saw the area of homes sold from January to March up 153.4 percent year on year. Valued at 51.2 billion yuan, this shows a year-on-year increase of 102.7 percent.

Given that home prices in major cities are still rising, Zhuang said the government should stick to the current policies, build more affordable housing and expand home purchase restrictions and property tax.