SHANGHAI (BLOOMBERG) - The coronavirus epidemic is accelerating a shake-out in China's property sector as a cash crunch forces distressed developers to throw in the towel.
With lockdowns across the world's most-populous nation entering their third month, smaller home builders are being pushed to the brink because they can't get enough money from pre-sales of apartments to cover their costs.
In the first two months of this year, around 105 real estate firms issued bankruptcy filing statements, after almost 500 collapses in 2019, data compiled by Bloomberg show.
"A vast number of mid- to small-sized developers will face a choice no one wants to make - either sell their property assets and start another business, or be bought out," China Index Holdings Research Director Huang Yu said.
"The shake-out is just beginning."
Even before the new coronavirus, China's housing market was under pressure.
Home prices rose at the slowest pace in almost two years in January and several developers, saddled with debt they're struggling to service, began to dial back on construction. S&P Global Ratings said in a note on Tuesday (March 10) that as Covid-19 spreads, the squeeze may be felt most acutely by Chinese banks and property firms.
As a result, mergers and acquisitions among the nation's almost 100,000 real estate companies will ramp up again in 2020, Mr Yu said, declining to put a number on the expected deal value.
"Declining sales will hurt developers' liquidity, as the proceeds still form the largest and most important funding source," S&P credit analyst Christopher Yip said, noting that with construction largely paused, delivery schedules and revenue recognition are being pushed further out.
"Several companies already in the CCC category or with low ratings with negative outlooks may face liquidity issues."
New York-based Avenue Capital Group, a firm that trades distressed debt and invests in special situations, said a China home market in flux spells increasingly versatile buying opportunities. It's looking at scooping up soured developer debt and buying troubled real estate projects at a discount.
"There'll be more bargains appearing on the market," said Wang Yifeng, Avenue Capital's Shanghai-based head of China. "If you see a distressed seller among the country's top 100 firms, don't be surprised."
Construction Halted According to S&P, new home sales in China will register their first drop in 12 years this year, with transactions down as much as 15 per cent. That's if the virus reaches a turning point this month. If the nadir isn't until April, sales could be down around 20 per cent, akin to the hit taken during the 2008 global financial crisis.
Fusheng Group is one of the first mid-sized developers to falter. The debt-laden company, based in China's southeastern Fujian province, was in talks to sell a 70 per cent stake to a consortium led by Shimao Property Holdings, people familiar with the matter said in December.
Local media reported in January that a new joint venture has been established, with Fusheng injecting its jettisoned property projects into the fresh vehicle. Shimao is one of the nation's biggest developers.
Representatives from Fusheng didn't immediately respond to messages seeking comment.
Cash flows of less competent players have been sliding for years and the virus is only making matters worse, according to Wu Rui, an executive director of non-performing assets at private equity firm CDH Investments Fund Management Co. Asset-management companies are teaming up with top developers and eyeing such businesses, he said.
In Hubei alone, the epicentre of the virus, there are around 4,300 developers. Home prices in Hubei's provincial city Wuhan rose at one of the fastest paces in the world last year, Knight Frank data show.
To the north, in central Henan province, the general manager of one small developer said the only target his company had set, in early February, was to make all of its debt repayments over the next six months.
Another manager at a small developer based in Zhejiang, a province in China's east, said the firm was two months away from bankruptcy. Its four projects under construction are halted because of the virus, he said.
"The epidemic could actually be a fresh opportunity for big developers," said Liu Ce, who's in charge of growth strategy at another large homebuilder, Shenzhen-based Kaisa Group Holdings.
"We can pull many levers to alleviate cash flow stress. Once you live through that, you see the wave of asset offloading by small players as a good chance."
Kaisa became the first, and only, Chinese developer to default on its US dollar debt in April 2015. It went through a huge debt restructure and spent years rebuilding its balance sheet and credit rating.
Now, it's regained investor confidence; Kaisa has already sold US$1.2 billion (S$1.67 billion) of bonds this year and in January, bought a site in Hong Kong's New Territories for HK$3.5 billion (S$630 million) to expand its foothold in the city.
But while the likes of Kaisa, Shimao and China Evergrande Group have hundreds of property projects nationwide, the majority of China's developers are small and unlisted, with sometimes just a handful of projects in one city. They're the ones most at risk from the twin forces of coronavirus and a slowing market.
Smaller developers also typically do not rely on bank loans or bond sales to alleviate funding concerns. Instead, they count on inflows from apartment sales, as well as shadow financing.
Policymakers have so far refrained from unleashing wholesale monetary stimulus measures for real estate firms, fearing that could result in a surge in home prices. Most support has come from marginal easing by local governments. The central bank reiterated earlier this month that real estate "definitely" won't be used to stimulate the economy.
Shenzhen on Wednesday allowed builders to draw on some cash deposits, which are usually held in reserve by banks during construction to ensure developers don't abandon projects. Still, local officials stressed the current home-buying restrictions won't be loosened.
Coronavirus may be the "straw that broke the camel's back for many small builders", said Xie Yangchun, an analyst at China Real Estate Information Corp.
"A new wave of industry consolidation has started."