Faulty towers

China's Agile Property only the worst of the best

Agile Property is crumbling. The Chinese real estate developer needs urgent financial assistance after the authorities detained its chairman and it had to cancel a $360-million rights issue. The shares fell by as much as 30 per cent on October 13. Yet, in China's property sector, it is just the worst of the best.

Chinese developers' most vital asset isn't land but cash. They tend to sell projects up front, and then use the proceeds to pay for construction. But most borrow to buy new plots. Agile's land bank for future projects has expanded by 20 per cent over two years. Its borrowings, including a $475 million loan due to HSBC and Standard Chartered by the end of this year, have increased by 53 per cent over the same period.

As a result, Agile's earnings before interest, taxes, depreciation and amortisation (Ebitda) in the 12 months to June was just 2.7 times its interest payments, according to Moody's, compared with 3.5 times in 2013.

When the market is weak, developers can only keep cash flow up by cutting prices. That's now happening nationally. Agile's average sales price per square metre between January and September was 20 per cent lower than a year earlier. To avoid spooking existing homeowners, developers across China are dangling deals that deliver lower real prices without changing the headline per-square metre price. Buy a flat and get a free balcony!

Even for those developers with cash, problems can develop rapidly. Agile has net debt of around 37 billion yuan ($6.1 billion), just under four times its projected Ebitda for 2014, according to Eikon estimates. It has the same amount again earmarked for tax payments, land purchases and building costs on its projects. A detained chairman might not bother homebuyers, but could deter banks and investors from offering more without very favourable terms.

Bad as Agile's predicament is, the real danger lies beneath ground level. China has thousands of developers, most of whom have no access to bank lending or international capital markets. Added together, the top 10 players account for just 10 per cent of the floor space sold per year. If smaller developers exacerbate the pressure on their bigger peers by slashing prices, it won't just be Agile that feels fragile.