Chinese Real Estate Developers Profits Drop, Debts Approach One Trillion3 May, 2011, 13:36. Posted by Zarathustra
Tags: Real Estate
Chinese real estate developers have finished reporting their first quarter results. According to this report, the profits of 113 real estate companies dropped, while inventories and debts rose to some unprecedented levels.
Recognised revenue in the first quarter of 2011 amounted to RMB54.646 billion, dropped 4.86% compared to the same period of last year, while net profits amounted to RMB8.195 billion, dropped by 1.09%. Out of 113 companies, 42 of them recorded drops in net profits, with some of them swung into loses. And out of 113 companies, 25 companies recorded loses in the first quarter. Of course, real estate developers pre-sell their projects before the actual completion and delivery for most of the time, such that what is recognised as profit often reflects the sales activities 6 months to 1 year ago. As a result, overall these real estate developers are not doing too badly as far as profits are concerned.
However, inventories increased in the first quarter. Inventories of real estate developers include projects under construction and completed but unsold properties. at the end of first quarter, inventories for 113 real estate developers reached RMB903.5 billion, increased by 40.21% compared to the same period of last year, with record low inventories turnover. Also, total debts reached the all-time high of RMB 1 trillion, increased by 41.27% compared to the same period of last year.
That is not very surprising. As the real estate market got really hot in the past 2 years, developers were getting more and more aggressive in acquiring land, so inventories increased. However, as the government is getting more and more aggressive in cooling the market, transaction volumes have been falling (while prices are still holding steady for now). As a result of slower sales, developers’ cash flows are hurt and they need to keep themselves liquid by borrowing. That is why we have seen a series of debt raising in Hong Kong by Chinese real estate developers over the past year or so. Finally, as the recognised profits and losses reflect what has already happened many months ago, the overall P&L picture is not too bad because it reflects the sales activities much earlier when government cooling measures were less aggressive.
With more aggressive cooling measures from the government and higher inventories and debt levels of the developers, the big question is for how long they can hold on. One of the misconceptions of the real estate bubble, in my view, is that Chinese people do not rely too much on leverage, such that there is no bubble to speak of. However, I have stressed previously (see 10 reasons to short China) that debts are not in the households’ balance sheets, but in real estate developers and local governments. For instance, households may have to put up 50% down payment to purchase, yet a local government could finance public rental housing projects with 70% debts.
The determination for the central government to cool the real estate market will sooner or later put enough strain on the finances of real estate developers such that the weaker ones will have to cut prices to keep cash flowing in. Local governments will also feel the strain of it as they have been relying on real estate related revenue for their finances.