Realty bites

Darwinian times for China’s property developers

Realty bites

Blue period for Greentown

Desperate times call for desperate measures. So Greentown’s latest asset sale makes you wonder just how frantic company bosses might be getting.

Since September, the Hangzhou-based developer has been in the news for its financial troubles (see WiC124 and 128). In December company chairman Song Weiping, a football fanatic, decided to put his favourite possession – his soccer club – up for sale. And to stay afloat, Greentown is also selling land to raise cash.

After selling half of its stake in Bund 8-11, a prime site on Shanghai’s riverfront, to Fosun in November, last month Greentown offloaded its remaining ownership to SOHO China for Rmb4 billion ($633 million).

Last week, Greentown announced that it had sold 51% of a smaller project in Jiangsu to Tianjin-based property developer Sunac for Rmb51 million in cash, and China Business News reports that the company is also thinking about selling further plots in Shanghai and Hangzhou.

For the Jiangsu sale Greentown made the rationale clear: it was looking for a cash-rich partner to develop the 222,600 square metre block in Wuxi.

According to its half-year report, Greentown’s debt to equity ratio stands at 163%, topping all the listed Chinese property developers. It also earned bottom score of just one in 100 in a recent credit risk assessment from StarMine, a Thomson Reuters investment service.

“Developers of high-end apartments have a greater need to maintain strong cashflow rather than rely on loans, compared to ordinary developers. That’s why Greentown with a high leverage ratio has severe financial strains,” says Liu Yuan, a senior research manager at brokerage Centaline China Real Estate.

Industry observers say all developers face tough times ahead as real estate prices will continue to decline in the first half of this year, before gradually stablising in the second.

Greentown’s supporters say it has enough of a land bank to weather the crisis, with 40.7 million square metres of land reserve as of June 30 last year. But the problem is that much of it was acquired close to the peak of the market in 2010. Investors are also less impressed with land bank data than previously – and more interested in hearing about contracted apartment sales and cash collection ratios.

The question being asked is whether problems at developers like Greentown could lead to a series of defaults. Most analyst think that unlikely: local governments don’t want developers to go bankrupt because they have depended on the property sector for growth.

Hence there are rumblings that the Zhejiang government is looking to throw Greentown, the province’s largest developer, a lifeline. According to the National Business Daily, this would not take the form of a direct capital injection; instead the local government would call upon state-owned companies to offer financial help to the cash-strapped developer through loan guarantees and other forms of supportive financing.

In mid-December, state-owned Hangzhou Binjiang Real Estate Group announced that it would be guaranteeing an entrusted loan of Rmb430 million that Greentown had contracted with ICBC. A month before, CIC, China’s sovereign wealth fund, signed up to a joint venture with Greentown, which was taken as a show of confidence in the beleaguered firm (see WiC132).

Meanwhile, there are probably some bargains out there for those in a stronger capital position. In December, SOHO China’s chairman Pan Shiyi told reporters that his Beijing-based property company had a war chest of Rmb20 billion (in cash) and was looking to buy land from cash-strapped rivals, even as the property market softened (the company’s strategy for taking advantage of other developers’ financial weakness was first raised by WiC in issue 17). Pan looks like he’ll have plenty of buying options. For now, the Beijing-based developer will be pleased to have got a foothold on Shanghai’s iconic Bund.

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