| HONG KONG
HONG KONG A cash crunch in China's real estate sector could leave well-funded developers as consolidators, providing a buying opportunity for investors betting on longer term growth in the mainland market.
As foreign funding for Chinese real estate dries up in the global financial crisis, developers who were once the darling of overseas investors have had to turn to their home market to meet their financial obligations.
A growing number are preparing various bond and rights offerings, as they seek funds to pay for their aggressive expansion of the last two years.
But many, especially weaker players, may have trouble raising funds from investors wary about a real estate bubble. And developers whose offerings fail could be forced to put themselves up for sale or face potential insolvency.
"Smaller names with weaker funding assets, weaker execution capacity, weaker marketing capacity, they will be forced to pull out ... they may be acquired by someone else," says Michael Wu, a director from Fitch Ratings, which holds a negative outlook for the country's residential property market in 2009.
Analysts say it is still too early to identify which firms may go into default or became acquisitions target.
But they are keeping a close eye on real estate companies' capability to meet financial obligations in the next 12 months for clues.
"Financing options available presently are onshore," said Christopher Lee, a director from Standard & Poor's (S&P). "Large, listed developers continued to have better access compared with smaller, private companies."
As credit dries up and inventories build, developers have been slashing prices to speed up sales and boost their finances.
The trend led S&P to estimate that another 20 percent across-the-board cuts in prices would cause deep liquidity problems at many developers, speeding up consolidation.
China Vanke Co (000002.SZ), the country's biggest listed real estate developer, cut housing prices by 10-15 percent in 2008, and Citigroup expects house prices to fall a further 10-25 percent in 2009.
Moody's Investors in January slashed Neo-China (0563.HK) to its second lowest rating, considering it to be at or near default, saying the developer had missed a coupon payment.
"We are likely to see more defaults and industry consolidation," said Bei Fu, a director from S&P.
Macquarie Research said China developers are entering the downcycle too highly geared. But firms such as China Resources Land (1109.HK) and China Overseas Land (0688.HK) are safer plays, it says.
Many developers are banking on the government's recent calls to support the real estate sector as part of its broader drive to prop up the economy during the global economic slowdown.
Property is a pillar of China's economy, accounting for a quarter of all investment.
China's residential sales revenue fell 20.1 percent in 2008, with housing prices down over 30 percent in some Chinese cities as the growth in the world's third largest economy slowed.
For a graph of Chinese urban property price changes please click here
Premier Wen Jiabao told the National People's Congress this month that China would take vigorous steps to stabilize the property market, hinting that real estate firms could receive government stimulus funds and loans from state-controlled banks.
Local governments are also allowing developers to defer land cost payments to support cash strapped firms.
While help for the sector is clearly forthcoming, such aid could be limited to stronger firms, as the government's main aim is to stabilize rather than revitalize the sector, analysts said.
"Those with low gearing are in a better position to benefit," said Paul Cheng, chief financial officer of Coastal Greenland (1124.HK), one of the smallest but highly geared developers which aims to speed up sales to meet debt obligations.
Vanke Chairman Wang Shi said many mainland property firms could face financing difficulties in 2009, providing an opportunity for companies with solid balance sheets to buy smaller rivals or land at low-cost.
Vanke has downsized its housing start target by 23 percent in 2009 after it recorded a 17 percent fall in 2008 profit.
SOHO China (0410.HK), which secured $1.46 billion in loan facilities from Bank of China (601988.SS), observed it is "now quite rare" to see lenders willing to commit huge facilities during the credit squeeze, Chairman Pan Shiyi recently said.
(Editing by Doug Young and Dhara Ranasinghe)