An oversupply of residential property and a market slowdown have left Chinese developers with their worst cash crunch in more than two years, revealing the extent of China's real estate downturn and paving the way for further consolidation in the sector.
A Reuters study of more than 80 China-listed developers that have declared March quarterly earnings showed cash to short-term-debt ratios at two-year lows amid a steady decline in margins since 2011.
That was the year the government moved to rein in the overheating housing market through measures including higher mortgage rates and limits on how many homes each family can buy.
But the government crackdown is only part of the story. A downturn in property prices, pressure to pay for last year's record land purchases, and a tighter credit market have combined to put severe strains on developers' liquidity.
The mounting pressure could lead to sales of assets such as land banks and completed projects as the government presses for consolidation in the highly fragmented sector, analysts and investors said.
Even without further government curbs this year, developers' financials will feel the pinch of subdued house prices, which fell for the first time in two years in May.
"The situation is quite severe now. Mid-sized developers are facing pressure as interest rates for trust loans are high, the impact will emerge eventually. The size of developers affected are getting larger," Hong Kong-based property agent Midland Realty COO Samuel Wong said.
"H2 will be worse than H1 when problems surface, unless there is more easing in policy or liquidity."
Caught between having to cut prices or raise capital, some developers are holding off for the moment, either using stop-gap measures or waiting for a bank rescue, according to industry insiders.
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"The market isn't favorable. We haven't decided whether to cut prices," said an official at unlisted Shenzhen-based developer Guang Group, one of China's top 100 developers.
"We're in restructuring (mode) now, such as introducing financial partners and consolidating projects."
Last month, the company said it had failed to deliver some properties to homebuyers on time because of financial pressures.
Margins hurt, liquidity drying
The deterioration in developers' financials has been felt on two levels.
Firstly, competition both for land banks and apartment sales has squeezed margins. Margins on earnings before interest, taxes, depreciation, and amortization are now in the low teens compared with nearly 20 percent at one point in 2011.
Meanwhile, the median cash to short-term debt ratio of the companies studied by Reuters has fallen to 0.77 from 1.11 at the end of 2012. A ratio below 1.0 is a red flag meaning cash is insufficient to cover debt coming due in a year.
Winsan Shanghai Industrial saw its cash to short-term debt ratio decline to 0.07 in the March quarter from 0.83 in end-2011. In that same period the company saw its EBITDA margin turn negative from 18.8 percent. The company did not respond to emailed questions.
London-based fund manager Yerlan Syzdykov at Pioneer Investments, which owns bonds in China property, said the deterioration in developers' financial positions was likely to trigger a long-overdue shake-up in the industry.
"We see more consolidation in the sector. They are leveraged and have lower cash balances because of land acquisitions - they need banks to step in and provide more liquidity," he said.
In a recent sign of such consolidation, Sunac China Holdings last month bought a 24 percent stake in peer Greentown China Holdings for HK$6.3 billion ($807 million).
Moody's said at a conference last month it expected to see more such moves as developers tried to scale up to win cheaper loans from banks.
Volatile as the sector may be, few expect China's property market to suffer a collapse like the sub-prime mortgage crisis that hit the United States.
"People are watching carefully but we're not worried yet," Pioneer Investments' Syzdykov said.
High downpayments, low household debt and expectations of continuing government support are commonly cited by experts forecasting the downturn will be short-lived, with prices expected to recover as economic growth steadies in the second half of the year.
Furthermore, a repeat of events that brought Zhejiang Xingrun Real Estate to the brink of bankruptcy is unlikely. The developer is estimated to owe 15 domestic banks 2.4 billion yuan and individual investors another 1.1 billion, with only 3 billion yuan of assets on hand.
"Full-blown defaults in this sector are rare as developers own assets which are worth something," said Thomas Kwan, head of fixed income at Harvest Global Investments in Hong Kong.
"The smaller developers can sell their projects or land in times of difficulty."