Developers' assets a ready cash supply

Editorial | Mary Ma 12 Nov 2021

Can the mainland real estate sector climb out of its dire straits after having been in the negative spotlight for awhile?

The crisis began with China Evergrande before spilling over to affect its peers.

They all face a common issue: a liquidity crunch under Beijing's three-red-line policy.

In short, this policy refers to three limits against which a developer's refinancing is handled: one, a 70 percent ceiling of liabilities to assets; two, a 100 percent cap on net debt to equity; three, a cash to short-term borrowing ratio of at least one.

Although the policy is intended to deleverage the sector to ease property bubbles, the China Evergrande crisis has sparked a bigger risk of crash-landing for nearly all players in the sector - including the Kaisa Group - though some of the latter are in greater shape financially.

As soon as confidence is lost, stampede ensues. Unless a real estate developer is able to borrow and sell its projects fast enough, it can be in danger due to a liquidity crunch even though it may be viable overall.

So can they emerge from the crisis and still stand?

It all depends on how far the central government is prepared to offer them a lifeline to ease their liquidity shortage.

Some critics have likened the situation to that of Lehman Brothers. While this comparison can be disputed, it is fair to say that, if Beijing insists on tightening liquidity under the three red lines, it could lead to an even bigger impact.

Mainland banks are reported to have stopped processing new mortgage financing applications for awhile, which has made property sales impossible for some developers.

But signs are emerging that this may be changing.

Another lock that has trapped developers is a requirement for pre-sale proceeds to be paid to accounts not accessible to the developers unless they apply to the authorities and are approved to do so.

The arrangement is meant to protect home buyers and is perfectly fine during normal times However, during such difficult times as now, the locking prevents developers from making use of the sales to cover other urgent needs.

Some developers are reported to have asked for greater flexibility in this regard.

As said, there appears to be signs that the situation could be starting to ease as the stock prices of certain developers, including China Evergrande, has stabilized.

Kaisa Group is a recent victim. A public misconception is that Sing Tao News Corporation is a subsidiary of Kaisa when, in fact, it is an investment of the Kwok Ying-shing family - even though Kwok is Kaisa's chairman.

Kaisa has a number of property projects and is prepared to sell them to meet liquidity needs.

A number of state enterprises have also reportedly expressed an interest in them, but the green light is still needed from the central authority.

Meanwhile, a Western-style full bailout is not the only way to rescue the sector. While avoiding the moral hazard, developers have valuable projects that can be turned into cash readily if they can dispose of them in a timely fashion.

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