Yuan Yihong: Attention! Rising financing costs are eroding the profits of housing enterprises

Text/Yuan Yihong

Since the second half of the year, the real estate market is undergoing a series of changes that are different even in the regulatory period. For example, financing has tightened across the board. When financing channels are controlled, costs rise.

According to the report data released by the Kerry Research Center on October 5, the total financing of 95 typical housing enterprises in September was 112.448 billion yuan, up 45.3% month-on-month and 17.2% year-on-year. In the first nine months, the financing cost of new bonds for housing enterprises was 7.03%, of which the financing cost of overseas bonds was 8.08%, an increase of 0.86 percentage points over the whole of 2018. Among them, the financing cost in September was 6.47%, up 0.76 percentage points from the previous month.

The rising cost of financing is mainly due to the tightening of financing channels in the real estate finance sector by regulatory authorities. Since the end of May, from all kinds of bond issuance, to trusts, to credit, and the linkage between housing loans and LPR, it clearly shows that the financial authorities do not relax their attitude towards real estate regulation and control and prevent real estate financial risks.

In my personal opinion, the increase in the financing cost of housing enterprises in the first 9 months is still within the acceptable range, and it is not as high as imagined. It may be because public opinion is a bit exaggerated to tighten financing, and this average data masks the huge difference, because many high-quality housing companies with high credit ratings can still obtain bonds with extremely low interest rates.

For example, Longfor Group announced on September 10 that it will issue US$850 million of senior notes due 2029 with an annual interest rate of only 3.95%. Previously, on July 23, KWG Pacific Group announced the issuance of US$300 million senior notes with a coupon rate of 7.4%; on July 30, Sino-Ocean Group and China Aoyuan announced the issuance of US$600 million and US$250 million senior notes with coupon rates of 4.75% and 7.95% respectively; on August 2, Jianye Real Estate announced the issuance of US$300 million senior notes with an annual interest rate of 6.875%.

From January to May this year, the financing scale of housing enterprises grew rapidly. According to Kerry data, the weighted average net debt ratio of 174 typical housing enterprises increased by 4.29 percentage points from the beginning of the year to 91.37%, which is the highest value in history, of which the net debt ratio of TOP10 housing enterprises has increased more significantly. It is worth noting that before the regulatory authorities compress and control the scale of real estate financing, the financing cost of housing enterprises in the first half of the year has been rising. The average financing cost of 70 key housing enterprises in the first half of the year increased from 6.68% at the end of last year to 7.04%.

Overall, comparing the data from January to September with that of January to June, it is not possible to conclude that the cost of funds has risen sharply after the overall tightening of financing.

Xiao Yuanqi, chief risk officer, press spokesman and director of the General Office of the China Banking and Insurance Regulatory Commission, said at the CBIRC briefing on September 11 that the adjustment of the credit structure is in progress, not completed. Xiao Yuanqi said that excessive financing of real estate is not good, and social funds have entered an industry, which is not conducive to the balanced development of the entire economy. In the past, banks conspired with housing enterprises to illegally bypass "blood transfusion" real estate through off-balance sheet funds, and the regulatory authorities mainly reduced these assets. According to preliminary statistics, the scale of illegal and nested businesses has shrunk by about 12 trillion yuan in the past two years – of course, illegal financing involving real estate is only part of it.

Xiao Yuanqi clarified that the regulatory authorities do not control the increase in loans of real estate enterprises, and banks should follow the national real estate regulation and control rules for granting credit to the real estate industry, and at the same time follow the regulatory rules.

That is to say, excessive financing should be suppressed, and illegal financing should be suppressed, but normal real estate financing will be guaranteed, and real estate enterprises do not have to scare themselves. However, the model of high leverage and high turnover of real estate can no longer go on. Real estate is returning to normal industries, not only in terms of growth rate, but also in terms of debt ratios and profit margins.

But at the same time, it cannot be denied that the financing costs of some housing enterprises have increased rapidly. For example, there are housing enterprises with high debt ratios and heavy debts this year, and the interest rate of a single bond issuance reached a staggering 15% in July. In the last three months and next year, this differentiation between enterprises will continue or even intensify, and as a result of the development, some housing enterprises will be out.

Due to the lag in the carry-over of sales performance, many mainstream housing enterprises have entered a period of rapid profit growth since 2016. In particular, Country Garden, Evergrande, Sunac and these enterprises have grown rapidly. However, the rise in financing costs this year is eroding the profits of some housing enterprises. As mentioned earlier, due to the limited increase in financing costs, the erosion of profits is not obvious at present, but by the time of the release of this year's annual report, the income statements of some housing enterprises with high debt scale and significant increase in financing interest rates will be uglier than last year. This situation, coupled with factors such as poor sales in the second half of the year, will be more severe to the cash flow of housing enterprises.

Rising financing costs will certainly erode profits, but as long as sales continue to grow, the cash flow of housing enterprises is guaranteed. Therefore, the top priority is to grasp sales. I have long been calling on housing enterprises to take measures to reduce prices and promote promotions as much as possible to cope with the dual pressure of tightening the external financing environment and poor internal cash flow. According to Kerry data, the cumulative sales performance of the TOP100 scale housing enterprises in the first nine months of the year only increased by about 4% year-on-year, but the amount of equity sales of the top 100 housing enterprises in September increased by 23.9% month-on-month, an increase of nearly 11 percentage points over the same period last year. Although it cannot be called "Golden Nine", the color is already good.

The most noteworthy is Evergrande. It is the earliest and largest promotional action in the country's large-scale housing enterprises, and it seems to have achieved remarkable results at present. Evergrande achieved a full-caliber performance scale of 83 billion yuan in a single month in September, a substantial increase of 73.6% over the previous month in August. In the first nine months of the first nine months, its equity sales were 430.8 billion yuan, ranking first in the industry.

Many housing enterprises, for a long time to live a comfortable life, to a large extent is not how good products it has produced, how excellent services it has provided, but hitched a ride on the express train of industry growth. But with the transformation of the development model, everything that exists in the old will have to be rewritten. High profits and high growth are no longer the result of assumptions, and elimination is no longer a static written term.

At the beginning of next year, after the intensification of the differentiation of housing enterprises, there should be a more exciting story to present.