China’s real estate prices have been in an unwavering uptrend over the last decade, in part fueled by government mandates and steady sourcing of Chinese bank debt financing. The coronavirus pandemic, however, is causing a downturn for property developers as volumes seemingly collapsed overnight. In instances where distressed operators have to raise cash quickly, either by accelerating sales or divesting properties to other developers, pricing can approach fire-sale levels.?
Macrolink was one of the first to falter. In the year leading up to its default, its FRISK? score was trending in the high-risk “red zone,” the “1”-to-“5” category of the 10-point scale. By March, Macrolink defaulted as it carried an “extremely tight” liquidity condition, according to Reuters. Macrolink Culturaltainment Development is also one of the few property developers that report quarterly, which allows the company to act as the proverbial canary in the coal mine for the industry. Based on the fiscal period ending Mar. 31, 2020 results, total contracted sales declined by 61.1% against last year’s comparable period and by 94.5% on a sequential quarterly basis. Meanwhile, total inventory, defined as property units finished and under construction, remained relatively flat. With nearly all sales halting overnight, Macrolink reported a gross margin loss, incurred significant associates and joint venture losses, and ended with a net loss of $330 million – the most challenging quarter reported in the company’s history. ?
Since the coronavirus pandemic started, operative builders (SIC 1531) in China and Hong Kong have shown a steep aggregated increase in financial risk. According to the FRISK? Stress Index, total risk today has more than doubled relative to 2007 levels, as shown in the chart below:
Within the FRISK? Stress Index, approximately 138 companies are currently trending in the red zone, that's 56% of the 245 Chinese construction companies that currently have FRISK? scores tied to their name. Due to the adverse business environment, profit margins have come under pressure. Throughout 2019, Chinese operative builders reported a median pre-tax profit margin of 8.2% which fell to only 3.2% in the first quarter of 2020. Under such circumstances, creditors should be scrutinizing distressed operators more than ever before.?
China and Hong Kong’s property development expansion cycles have been upended by the coronavirus pandemic in terms of contracted unit volumes. Multiple real estate operators reporting first-quarter results showed significant declines in net sales and profitability. In such a challenging environment, financially distressed operators are defaulting and less capable of refinancing relative to the pre-COVID environment. If relatively smaller distressed builders cannot cure their payments or stretch maturities, creditors may force these particular companies into legal proceedings commensurate with corporate failure. For a free risk assessment on all public construction and real estate companies in the Asia-Pacific region, contact us today to see what more than 35% of the Fortune 1000 use in their daily risk management process.