Covid hammers China's developers by starving them of cash flow

CHINA'S worst Covid-19 outbreak in 2 years is prolonging the country's property slump, starving stressed developers of cash and weighing on the economy.

Only weeks ago, things were looking up for the battered real estate sector after the government pledged to prevent a disorderly collapse. Now the industry is contending with lockdowns in key cities including Shanghai that are keeping prospective homebuyers away.

A 29 per cent drop in new home sales in March was the biggest since they began falling last July, according to official figures released Monday (Apr 18). Seven months of falling home prices are adding to the pain.

"With the Covid outbreaks it's hard to call the market bottom," said Ziv Ang, a Kuala Lumpur-based analyst at UOB Kay Hian, who had previously expected home sales to trough around May.

That's a fresh setback for debt-laden developers, which have been hoping for a rebound in sales to help them withstand their liquidity crisis as financing dries up and more bonds come due. It also adds pressure on policymakers to shore up an economy that's facing weakening consumer spending and the highest unemployment rate since the early months of the pandemic.

Lockdowns are hitting some of China's strongest economic belts, from the manufacturing heartland in the Yangtze River Delta area in the east to trading centres in the Pearl River Delta in the south. In Shanghai, the biggest housing market among tier-one cites, a dozen new-home projects due to go on sale were postponed because of the pandemic, according to research last week by property consultant Tospur.

"One major loser amid lockdowns is the property sector, which is now in the darkest moment with lots of defaults and consolidations," said Larry Hu, head of China economics at Macquarie Group. "At the national level, more policy support is needed for the sector to turn around."

Already one builder, Zhenro Properties Group, has blamed the virus wave for missing bond payments this month, adding it to a growing list of defaulters.

Real estate firms have been trying to woo customers online, with mixed success. While some have convinced homebuyers to view apartments with virtual reality technology since March under partial Covid restrictions, full lockdowns in April eventually threw housing activities into a standstill, according to Lu Wenxi, an analyst at property agency Centaline Group.

"I'm now worried about being fired," said You Zheng, a 26-year-old real estate agent who had been handing out leaflets to passers by with his mask on for months. "It was difficult enough last month when prospective buyers were afraid of being locked in a compound during apartment viewing. Now, who knows when sales can resume."

This time, the potential blow is likely to be worse than it was during the first outbreak more than 2 years ago in Wuhan. Property sales in the inland city account for just 0.8 per cent of the nationwide total, while the recently grounded Shanghai and Shenzhen make up a combined 6.5 per cent.

What's more, homebuyer sentiment is much more fragile now than it was in early 2020, before the government's crackdown on excessive leverage triggered the cash squeeze and disrupted construction. Back then, pent-up demand led to a quick recovery.

"The Covid outbreak is so sudden that it brings new risks to the real estate industry, which is already in a trough," said Sheng Songcheng, a former director of the People's Bank of China's statistics and analysis department. "Given the overall property policies are still strict, whether home sales can eventually repeat a substantial rebound like the one seen in 2020 needs to be seen."

Chinese developers will face their biggest bond maturity wall in years in July, according to Bloomberg calculations. Refinancing is still constrained for the majority of private players, with average yields on offshore junk-rated debt dominated by builders above 20 per cent.

While developer bonds and stocks have climbed in recent weeks on the government's pledge to help, the rally has begun to lose steam amid scant signs of policy details.

"Sentiment may improve only with a turnaround in distressed developers' liquidity, which is unlikely in the near term without stronger policy support," Bloomberg Intelligence analyst Kristy Hung wrote in a note this week. "Covid's spread adds additional near-term threats." BLOOMBERG