Shanghai’s reopening comes too late for stressed developers

China’s stop-start reopening may be too little, too late to save some cash-strapped property developers. 

Among 32 builders that have defaulted since the start of last year or are currently facing debt-repayment pressure, at least 13 have derived more than a third of their sales from the Yangtze River Delta area anchored by Shanghai, according to Bloomberg calculations based on company data.

The manufacturing heartland has started emerging from crippling lockdowns imposed as part of the country’s Covid Zero policy following a surge of infections.

“The lifting of the lockdowns won’t necessarily provide an imminent relief to developers that have traditionally invested in the region,” said Amy Kam, a senior portfolio manager at Aviva Investors Global Services Ltd. “Unless funding channels are reopened, many private developers will continue to struggle to pay down debts with operating cash flow.”

Many Chinese developers were struggling long before the Covid outbreak of the last several months slammed the brakes on the economy.

Developers with more exposure to the Yangtze River Delta region had bigger sales drops in March and April than the industry average, Kam said.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

As Shanghai ground to a standstill and mobility slowed in adjacent areas, defaults spread to Sunac China Holdings and Zhenro Properties Group.

Meanwhile, state-backed Greenland Holdings stunned investors last month with a proposed bond-repayment extension. All three firms cited the Covid outbreak.

Green shoots have started to emerge. New-home sales in Shanghai during the second week of the city’s reopening climbed to 162,400 square meters from near zero, according to property-services firm Centaline Group. Still, that’s about 20 per cent below a closely watched level used to gauge sales health.

Regional economic hubs in the Yangtze delta, including Shanghai and Hangzhou, are likely to see home sales recover in the third quarter as demand is exceeding supply, China Real Estate Information analysts predicted in a Saturday note.

Stronger so-called tier 3 cities like Suzhou, where industrial parks abound, may not see a recovery until the fourth quarter.

But improving sales at developers with heavy exposure to the region may be of little benefit to the likes of Greenland and Powerlong Real Estate Holdings, given sizable near-term debt payments.

Chinese builders overall have US$34.8 billion of local and offshore notes maturing in the third quarter, according to data compiled by Bloomberg, and property firms have already set a full-year record for offshore defaults.

“The unlocking of Shanghai came too late for some distressed developers, including Greenland and Powerlong,” said Dan Wang, a Bloomberg Intelligence credit analyst. “It may not bring in enough cash flow in the short term.”

The two developers didn’t immediately provide a comment to Bloomberg News, but Greenland told investors last month it will restore its ability to repay debt through the second half of 2022 if Covid impacts ease.

Firms are also facing fallout from fresh Covid outbreaks in Shanghai that have prompted officials to reimpose some restrictions. That as President Xi Jinping is unlikely to shift from his Covid Zero approach any time soon, leaving the country stuck in a cycle of shutdowns and reopenings.

Some Shanghai-based builders are poised to withstand the disruptions, according to Aviva’s Kam, with CIFI Holdings Group seen having better refinancing prospects and Seazen Group likely to handle this year’s debt maturities. 

Still, “it could well be a slow recovery given China’s ‘one step forward two steps back’ approach in relaxing Covid restrictions,” said Kam. BLOOMBERG