China developer inventories climb

On Thrusday I pointed to the falling profits of Chinese real estate developers.  On Friday, Xinhua reported that real estate inventories of property developers continue to rise. 

Among 75 of listed real estate developers listed in A share market, total inventories have reached CNY725.88 billion, an increase of 41.38% from the 3rd quarter of last year.  The debt-to-asset ratio is also hitting new high.  Among the same 75 real estate developers, the debt-to-asset ratio increased by 2.75 percentage point from 62.83% in the 3rd quarter of 2010 to 65.58%.  Even the bigger players, like Vanke, are seeing a debt-to-asset ratio of 78.97%.

Not surprisingly then, with slowing sales, higher inventories and debt levels, operating cash flows deteriorate for real estate developers.  The outflow from operating activities for the 75 real estate developers as a whole has deteriorated from CNY(36.086 billion) to CNY(45.23 billion), and the cash balance of these real estate developers has fallen from CNY140.779 billion to CNY132.771 billion.  This is completely consistent with my long-held view that as the property market slows, property developers will be under pressure with their cash flow.

The view here is that the property market slowdown inChina has begun, as we have seen more aggressive price cutting by property developers (while homeowners are seriously angry about that).  The fundamentals have just started to deteriorate.  Despite all the optimistis that the market has about relaxing purchase restrictions and possibly monetary easing, I am not going to turn upbeat because once established, the declining trend will not be easy to reverse.

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Comments

  1. “Among 75 of listed real estate developers listed in A share market, total inventories have reached CNY725.88 billion, an increase of 41.38% from the 3rd quarter of last year.”

    That is a massive increase. I bet it gets alot larger.

      • It will be interesting to see how many come on the market that have already been sold. Add this to the new inventory coming on the market then makes you wonder what is about to happen.

        • Mainly when he was asked about whether the Chines authorities could pull off a soft-landing. And he responded by recounting the tale of Feds trying slow versus locals aiming to speed up. Didn’t lead anywhere…

          • I think he was just outlining the problem: The Feds want a slowdown, but its in the local govts interest to keep madly building stuff.

            I think the implication was the Feds will have to push on the brake harder than they might otherwise need to, and could overdo it.

            I have to say the whole Chinese slowdown scenario seems far more ‘real’ recently. Its always been about what might happen, but now it appears it is happening. Real estate transaction volumes, and the iron ore price being the most obvious indicators.

          • Well, yes, I said “thin” not “wrong”. I wanted more, much more.

            You;re absolutely right that the China slowdown has become real despite the denials of the ore magnates – prices don’t lie.

            Why do you think I’m calling for a rate cut?

  2. Question, what exactly as a % or figure of our minerals are going to just China. Secondly, what % or figure is being used solely on the construction boom (property & infrastructure development) in China. Does anyone have such data, does it even exist??

    I’m just trying to work out how connected we are to China and the possible implications for Australia if China were to stop importing our dirt.

    Thanks =D

  3. “Among the same 75 real estate developers, the debt-to-asset ratio increased by 2.75 percentage point from 62.83% in the 3rd quarter of 2010 to 65.58%. Even the bigger players, like Vanke, are seeing a debt-to-asset ratio of 78.97%.”

    Debt:asset ratios pfffft!. The debt:equity ratios implied above are between 2:1 and 4:1. If the assets are not valued conservatively, then the true gearing profiles will be much worse. The quick assets (cash) position looks very lean to me, considering cash is draining from the developers and prices are falling…grievous.

  4. My old accountant spent 20 mins about 18 months ago spruiking a land / dev deal in China.

    I say old as we fired him after that.

    I wonder how many of his customers that he sold in the Chinese property development deals are now wondering if they did the right thing?

    Good luck getting your cash out of China as a Mum and Pop investor!

    TM.