The Real Deal New York

Chinese developers are seeing soaring profits. But there’s another metric investors should watch

A review of 80 publicly traded real estate companies found that cash-to-short-term debt levels reached a three-year low
September 05, 2018 11:15AM

(Credit: iStock)

At a glance, Chinese developers’ earnings appears promising, but a closer look shows their ability to refinance debt is at its lowest point in three years and has more than halved in the past year.

Profit levels among the 10 largest Chinese developers increased an average 75 percent in the first half of 2018, compared to the same time last year, while gross margins reached a six-year high of 32.8 percent, according to Bloomberg.

But despite the uptick in profit levels, Chinese developers’ ability to service debt has plunged. A review by Bloomberg of more than 80 publicly traded real estate companies found that cash-to-short-term debt levels were at an average 133 percent, a drop from 297 percent the same time last year. It is the lowest rate since the first half of 2015.

Sign up for China Watch for weekly emails on Chinese real estate investments.

This comes as the sector faces a $23 billion maturity wall in the first three months of 2019, according to Bloomberg’s calculations. And nearly $20 billion could be tacked on to that figure if bond investors request early repayments.

“Although developers try to hoard cash, their buffers are draining,” Christopher Yip, a real estate analyst at S&P Global Ratings, told the outlet.

The findings have been attributed to firms selling increasing amounts of bonds in the local market as well as higher borrowing costs due to the U.S. Federal Reserve tightening. [Bloomberg] — David Jeans