Drop in Land Purchases Signal Cash Woes for China Developers
(Bloomberg) -- Investors trying to identify the next batch of Chinese developers that could run into liquidity troubles should look for firms that have reported a sudden drop in land purchases relative to sales, according to Bloomberg Intelligence.
Developers including Guangzhou R&F Properties Co. and KWG Living Group Holdings Ltd. have posted the biggest gap in rankings for land spending to condominium sales, Bloomberg Intelligence analysts led by Kristy Hung wrote in a note Monday. Since cash is required to buy land, this rankings gap could be a better indicator than normal leverage metrics, which often ignore off-balance-sheet borrowings, they said.
“A sudden decline in developers’ land spending to contracted sales ratio may hint at possible liquidity woes, as it’s set to hamper their development pipelines,” the analysts wrote.
R&F and KWG didn’t immediately respond to requests for comments.
Other firms that have seen a drop in land spending include China Evergrande Group, whose debt crisis has sparked a sell-off in other developer stocks and bonds in recent months, and Shimao Group Holdings Ltd., which has come under stress after a unit failed to make a loan payment. Developers with stable or rising land investments include Yeuxiu Property Co. and China Resources Land Ltd., BI said.
The missed trust loan payment by Shimao added to investor concerns about the opaque financial status of Chinese developers. Shimao has long been considered one of the healthier builders, partly because it had passed all of the so-called three red lines -- metrics introduced to curb borrowing among developers. Kaisa Group Holdings Ltd., which also passed all debt metrics, was labeled as a defaulter by Fitch Ratings last month.
Chinese developers usually set aside a stable portion of sale proceeds to purchase land parcels, and risky developers may be hoarding cash ahead of payment difficulties. Evergrande’s land spending ranked 30th last year, even as it ranked fifth in property sales, according to BI, based on data provided by China Real Estate Information Corp. Shimao ranked 55th in land-buying last year, far lower than its 12th ranking by sales.
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