Newly listed Chinese developers to face challenges, says Moody’s

HONG KONG: The improvements made by eight major Chinese property developers to their capital bases and liquidity positions during September – December 2009 with a total raising of HK$38.5 billion (US$4.9 billion) through IPOs on the Hong Kong Stock Exchange may be short-lived, says Moody’s Investor Services.

“Debt leverage is likely to rise again and exceed the levels seen at the time of the IPOs as the sector continues with its ingrained strategy of pursuing higher growth and bigger scale,” says Peter Choy, Moody’s vice-president and senior credit officer in a statement on Dec 15.

He said it was common for the debt-to-total capitalisation of those developers already rated by Moody’s to increase some by 10% to 15% in the two years after their IPOs and a similar trend is therefore expected for most of the recently listed developers.

“Usually funds are spent on the expansion of landbank and larger scale developments and experience indicates that Chinese developers generally go over budget in their land acquisitions,” he said in conjunction with the release of a special report on the implications of recent IPOs by Chinese property developers.

He added that the companies are likely to see debt leverage increase over the next two years as they are pressured by shareholders to grow.

According to the report, although the Chinese real estate market is expected to be stable in 2010, it will not be strong enough to support the aggressive targets set by the newly-listed companies and their reliance on strong pre-sales to reduce their borrowing needs may prove to be misplaced.

Furthermore, the report says Chinese banks will likely reduce loan growth in 2010 to reinforce the banking system, hence availability of mortgage finance will not be as strong as in 2009.

The report entitled “Moody’s comments on New Chinese Developers’ IPOs: Risk profiles to rise after IPOs” can be accessed on

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