Chinese developers' land acquisitions raise risks
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E-mail Shanghai Daily, July 25, 2012
Although prices of land have not declined but remained stable, some Chinese developers have been active buyers in recent months.
For example, Yuzhou Properties Company Limited acquired land plots in Hefei, Anhui Province and Tianjin in July, while Longfor Properties Company Limited, Evergrande Real Estate Group Limited and Agile Property Holdings Limited all actively acquired land in the first half of this year.
The developers' purchase and risk appetites reflect their expectation that a recent rebound in sales in China's property market will continue. Despite government officials' reiteration of strict real estate policies remaining in place, they have not yet tightened existing restrictions to prevent the latest round of increase in real estate activity.
More accommodative monetary policies following recent cuts in interest rates and a relaxation of required reserve ratios have lowered developers' borrowing costs and supported liquidity.
The situations are making developers more willing to expand their operations lest they miss opportunities to benefit from a sustained recovery in China's property market.
Last Tuesday, Kaisa Group Holdings Limited announced land acquisitions in the city of Dalian, Liaoning Province, for a total consideration of 814 million yuan (US$128.8 million), and Central China Real Estate Limited announced land acquisitions in Henan Province for a total consideration of 312 million yuan.
Material size
Combined with their other land purchases completed so far this year, the two developers have together spent approximately 3.3 billion yuan, a size we consider material for them.
The purchases are credit negative for both issuers because using their cash on hand or bank funding diminishes their liquidity in an uncertain operating environment, which overwhelms the benefits they would reap from developing their economies of scale.
Kaisa's land acquisition in Dalian poses more negative credit implications than Central China's acquisition in Henan.
Kaisa, based in Shenzhen, Guangdong Province, has an established market position in southern China.
Extending footprint
In recent years it has rapidly extended its footprint to other major cities in northern, western and central China to diversify its operations.
Given the company's short track record in developing commercial projects in the city of Dalian, the recent land acquisition there will raise the developer's business and execution risks.
In contrast, Central China is based in Henan and has a long track record of operating in the province, where property markets are relatively stable because of growing housing demand.
Its land acquisition in Henan will reinforce its market-leading position there, although it will also increase its concentration risk.
We expect Kaisa would have to raise additional borrowings to maintain an adequate cash buffer of 3.5 to 4.5 billion yuan against an uncertain operating environment.
Such an increase in borrowing would increase the risk of breaching financial covenants and raise the already high level of debt capitalization ratio above 55 percent.
Franco Leung is an assistant vice president and an analyst with Moody's Investors Service Hong Kong. Fiona Kwok is an associate analyst with Moody's Investors Service Hong Kong. The opinions are their own.
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