China developers: hard pressed, not yet distressed

By Dominic Whiting and Tony Munroe - Analysis

HONG KONG (Reuters) - Bargain Chinese property projects will be up for grabs in coming months as developers scramble to survive falling home sales and a funding crunch.

But circling foreign funds can no longer expect a big firesale as the government eases its tough steps to cool the market, fearing mass bankruptcies and a property price slide that would send a shiver through the economy.

When Beijing upped the ante in a fight against property speculation at the end of last year by ruling that buyers of second homes must pay 40 percent in equity, apartment sales and prices slid in the southern cities of Guangzhou and Shenzhen.

Developers, already squeezed by a land appreciation tax and a clampdown on bank lending, then found that capital market turmoil closed off share and debt issuance.

Some fund managers believed their time had come, and cheap deals would open up a Chinese property market where a yearly influx of 8 million people into cities promises long-term riches.

They are still waiting.

"We expected there to be a lot more guys going under and a lot more forced sale situations," said Chris Gradel, managing partner at Pacific Alliance, which manages about $4.5 billion in alternative asset funds targeted at China and Vietnam.

Describing the resilience of Chinese developers as "one of the biggest surprises of the year", Gradel said property firms had muddled through with presales, delayed payments to contractors, and borrowing from banks and other sources.

Local authorities have also been stretching payment schedules for land, and choosing not to implement a government edict that developers lose land if they fail to build within two years.

PIGS FOR DIGS

However, with bank loans to developers down 30 percent in the first half of this year to 399 billion yuan ($58 billion), according to the central bank, thousands of firms are vulnerable, especially if they took part in a land buying frenzy last year.

"The guys who blew all their cash in the second half of last year are the guys who are having the most trouble," Gradel said. "I think there's a good chance we'll see some more distress over the rest of the year."

So far, few bankruptcies have been reported, even as Beijing and Shanghai home sales fell by half in July from a year earlier.

Nanjing property tycoon Liu Fulin abandoned his home building business in February in favor of pig farming when hog prices soared, local television reported. Another firm in the eastern city, Nanjing Panlong Jinling Property Development Co, went bankrupt in July, according to property website focus.cn.

The downturn was best illustrated by Changhui, one of the country's biggest property agencies, which closed half its 1,800 outlets late last year as sales dried up.