Falling flat at 30

This one didn’t even last 30 days

“We found cracks in the living room walls the second year we moved in,” Guo Fan, a 30-year-old homeowner in Beijing, told the China Daily. “We call the real estate company every year to fix the problems… They told us that these are not big quality problems, but we don’t want to wait until the building falls apart.”

Guo’s complaints are not uncommon. And according to Qiu Baoxing, vice-minister of housing and urban-rural development, they are probably to be expected. After all, the life span of the average residential building in China is less than 30 years.

“Every year, new buildings in China total up to 2 billion square metres and use up 40% of the world’s cement and steel, but our buildings can only stand 25 to 30 years on average,” Qiu told a conference last week.

This is some way less than the 50 year target life span that China has set for residential property (by way of comparison: actual life spans for British property are 132 years and 74 years for America).

Needless to say, Qiu’s comments quickly caused concern. Homeowners are reasonably upset that their properties might not even last the life of the mortgages they are using to finance them.

“Normally the loan for a home is 20-30 years, so before you can finish paying the loan your home is already falling apart, what a tragedy it is,” lamented a netizen on Sina.com, a popular internet portal.

But critics say Minister Qiu’s remarks hardly count as a revelation – more a case of stating the obvious since the quality problems that plague construction are well known. These are sometimes revealed to dramatic effect (in WiC23, we reported on a newly constructed apartment block in Shanghai that toppled over completely – see photo).

It doesn’t help that many mainland property developers have little experience in construction, says the Guangzhou Daily. Many are new to the industry, attracted by rising prices and high margins.

Take Youngor Group, one of the country’s largest apparel makers. The Ningbo-based menswear producer is principally engaged in the production of knitted products – as well as property development. Would you want the company that makes your polo shirt to build your house?

Still, some of the developers may not find it as easy to make money as they hoped. Analysts are beginning to worry about their finances, and that some firms may have balance sheets as shaky as the foundations of their buildings.

The torrent of carefree lending from the state-owned banks is one culprit. Last year alone, debt levels for 86 listed property developers in Shanghai and Shenzhen soared more than 30% to Rmb604.5 billion ($88 billion). By the end of 2009, 56 of the 86 property developers had a debt-to-asset ratio of over 60%, and 46 are above 70%.

“It would be safe for a developer if its debt ratio is under 55%,” says an analyst with Huatai United Securities. “Judging from the current situation, developers with high debt ratios will face hard times if the interest rate is raised or the government tightens property policies.”

Tougher times may loom. China’s leaders have been trying to rein in bank lending, and have been introducing an array of policies to cool the market such as requiring higher downpayment for second homes. Shanghai’s local government is also planning a property tax to slow purchases of luxury apartments.

A weaker sales environment could lead to cash flow concerns for some of the property firms. During the boom times, more highly leveraged operators enjoy super-charged returns on equity. But in weaker market conditions, some could find it tougher to pay down or refinance debt, which could then lead to a surge in non-performing loans in the sector.

Beijing is certainly aware of the gathering clouds: Liu Mingkang, head of the China Banking Regulatory Commission, has announced that he has ordered banks to review loans extended to property developers “project by project”, the Hong Kong Economic Journal reported.

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