House hunting is of course the last thing on people’s minds during an epidemic. Business is understandably slow for property developers around China. Last year, local regulators unsuccessfully rolled out restrictions in an attempt to control surging home prices. Now, the coronavirus outbreak may well manage to do what the government could not. The coming weeks will bring the biggest test yet for China’s most indebted property developers, such as Evergrande and Guangzhou R&F.
Not only have showrooms closed in many cities but home sales have been banned in some. Others have had to restrict construction. More than 15 cities are in lockdown. Evergrande, China’s largest real-estate developer, has shut for business until February 20.
Even a few weeks of weak sales can have a disproportionate impact on property developers that sell units before they are built. Deposits and advance payments matter to their cash flow. Remaining construction costs are funded with debt. One source, offshore bond issuance, has more than doubled in January compared with last year.
For Evergrande, already buckling under an $116bn debt mountain as of the end of June, borrowing costs have been rising. Its net debt to equity ratio is more than 150 per cent. Guangzhou R&F’s ratio is well above 200 per cent, more than double the sector average. Meanwhile, rival China Vanke has only a quarter as much leverage.
Worse, about 46 per cent of Evergrande’s debt comes due by the middle of this year according to Bloomberg. The developer paid as much as 12 per cent to raise $2bn in its latest overseas bond issuance, just to repay older debt.
Shares of Evergrande, down about a fifth since mid-January, trade at less than five times forward earnings. This is well under half the levels regional peers are at, reflecting debt concerns. Perhaps a lot is priced in, but the threat of more bad news for all developers this quarter suggests it is too early to move in.
Our popular newsletter for premium subscribers Best of Lex is published twice weekly. Please sign up here.