Agile Property's woes show up fragility of China's developers

Beijing (Reuters) - Agile Property is crumbling. Its shares fell by as much as 30 per cent on Monday following news the Chinese real estate developer needs urgent financial assistance after the authorities detained its chairman and it had to cancel a HK$2.8 billion (S$460 million) rights issue.

Yet in China's property sector, it is just the worst of the best.

Chinese developers' most vital asset isn't land but cash. They tend to sell projects up-front, and then use the proceeds to pay for construction. But most borrow to buy new plots. Agile's land bank for future projects has expanded by 20 per cent over two years. Its borrowings, including a US$475 million (S$604 million) loan due to HSBC and Standard Chartered by the end of this year, have increased by 53 per cent over the same period.

When the market is weak, developers can only keep cash flow up by cutting prices. That's now happening nationally. Agile's average sales price per square metre between January and September was 20 per cent lower than a year earlier. To avoid spooking existing homeowners, developers across China are dangling deals that deliver lower real prices without changing the headline per-square metre price. Buy a flat and get a free balcony!

Even for those developers with cash, problems can develop rapidly. Agile has net debt of around 37 billion yuan (S$7.7 billion), just under four times its projected EBITDA (earnings before interest, taxes, depreciation and amortization) for 2014. It has the same amount again earmarked for tax payments, land purchases and building costs on its projects. A detained chairman might not bother homebuyers, but could deter banks and investors from offering more without very favourable terms.

Bad as Agile's predicament is, the real danger lies beneath ground level. China has thousands of developers, most of whom have no access to bank lending or international capital markets. Added together, the top ten players account for just 10 per cent of the floor space sold per year. If smaller developers exacerbate the pressure on their bigger peers by slashing prices, it won't just be Agile that feels fragile.