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.