For China's developers, a 'stable' 2017 beckons

Analysts say realty market conditions may be challenging now, but bright spots abound too

Debt management will improve, demand for housing in key cities will sustain, and the "develop-and-manage" model will find acceptance, which will help developers to explore new paths for development, they said.

"A conventional concern for surging debt pressure seems to have found solution with more developers using financial tools to hedge risks," said a research note from Ping An Securities.

China's real estate developers have been clearing their US dollar-denominated debts to prevent losses as the currency was strengthening against the Chinese yuan in recent months, a situation that may pile on more pressure on smaller players than bigger ones.

Developers' financial condition worsened recently after the market saw sales growth slowing due to policymakers' moves against potential overheating in the residential market in key cities and speculative buying, said analysts.

Dollar-debt issuers have been learning lessons from the past－they are reducing losses caused by exchange rate fluctuations through swap transactions or by retiring debts well before maturity.

Issuing US-denominated bonds in overseas market used to be a major financing channel for many developers in the past three years. For, interest rates here were lower than other channels. But now, this "low-cost" financing option is no longer economical for developers as the dollar has gained more than 3 percent against the yuan in the past two months.

According to data of Shanghai-based Wind, a financial information provider, China's real estate developers have been retiring dollar-denominated debts before maturity since the beginning of November. So far, they have cleared off debts of more than $1 billion in all.

For instance, on Nov 28, Hong Kong-listed, Chongqing-based LongFor Properties Co Ltd informed the Hong Kong Stock Exchange that it has redeemed callable bonds of $417 million maturing in 2019.

Analysts said that such moves will help developers to reduce loss caused by exchange rate fluctuations, and will help them to create more room for further financing.

"The trend is that more developers that have bought US-dollar debts are going to do the same, as they are likely to shift from overseas market back to the domestic market for financing," said Zhang Dawei, an analyst with Centalaine Property.

A research note from Moody's, which rates 50 listed developers in China, said the outlook for developers for 2017 is "stable" as support from market demand remains, income is steady and pressure for financing and re-financing is under control.

"Credit indicators of rated developers... have been improving, creating easier financing conditions that potentially brings more liquidity to the market. Total size of developers' debts that mature in 2017 is relatively small, and both loans and bond markets are open to developers, so risks for refinancing are under control," said Yang Liu, an analyst with Moody's, in the research note.

The report further said risks that developers face are largely not from external market conditions but internal factors, including decreasing support from the parent group concerned, or disagreements among shareholders, which vary case by case.

Only two out of 50 rated developers are facing considerable pressure of re-financing, said Moody's.

Ren Zhiqiang, former chairman of real estate company Huayuan Property Co Ltd and a real estate market veteran, said as long as economic growth is positive, job opportunities will increase, urbanization will proceed apace, solid demand for residential properties in key cities will remain robust, and developers that hold quality projects in such cities are likely to see stable cash flow through sales.

Urbanization and China's shifting economic growth pattern driven by consumption will generate more diversified demand, giving developers more opportunities to develop new types of projects, said analysts.

A research note from CICC Ltd said that about 100 million residents will be migrating to urban areas in the next few years, creating a leasing market whose size will exceed 1 trillion yuan.

"We expect that long-term leasing services will take some 20 percent of the entire leasing market in the next few years, and it is observed that more developers are entering this market," said the research note.

Increasing numbers of developers listed in Shanghai, Shenzhen and Hong Kong are also adopting more sophisticated business models, shifting from previous "develop-and-sell" to "develop-and-manage".

Some developers are building up communities, which integrate commercial properties, residential properties, and public facilities all together, said analysts.