Chinese real estate market could experience more pain, although the Evergrande crisis may ease


People look at models of houses at the 2021 Dalian Autumn Real Estate Show at the Dalian World Expo Center on October 15, 2021 in Dalian, Liaoning Province of China.

Liu Debin | China Visual Group | Getty Images

BEIJING – Concerns over high debt levels by Chinese property developers have rocked investors despite signs that real estate giant China Evergrande could make headway in solving its debt problems.

It’s an indication of further pain to come in the Chinese real estate market, analysts told CNBC.

Since the end of the summer, global investors have been watching Evergrande’s ability to avoid the official default – and are concerned whether the fallout could spill over to the rest of China’s real estate sector.

Other major developers have also reported liquidity issues over the past few days.

Chinese real estate stocks traded in Hong Kong fell mainly last week. Evergrande was among the least affected and lost around 1.3% for the week.

On the debt front, the Markit iBoxx Chinese high yield real estate bond index fell 11.5% last week, according to IHS Markit.

“The market is a little more worried,” Gary Ng, Asia-Pacific economist at Natixis, said Thursday in a telephone interview. He pointed out how tighter government debt regulations have restricted liquidity, which has spilled over to more developers.

“We still think the majority of this stress” will be on private sector companies and “on small developers and high performance space,” Ng said. “State-owned developers, or the general investment category [space], these seem pretty stable. “

According to Natixis, only five of the top 20 Chinese real estate developers by assets in the first half of this year were central government-owned companies.

The three developers who have recently caught the attention of investors do not fall into this state-owned category.

Evergrande is the industry’s largest issuer of high yield bonds denominated in US dollars, according to Natixis.

Kaisa Group Holdings, the second-largest issuers of high-yield bonds, suspended trading of its Hong Kong-listed shares on Friday before the exchange opened. The developer’s shares were already down nearly 13% for the week after the announcement of a default on a wealth management product.

Another big Chinese developer, Shimao Group Holdings, traded down about 14% on Friday in Hong Kong. The company revealed in a document Thursday that it will only allow institutional investors to buy seven of its Shanghai-traded bonds, effective Friday. Existing retail investors must sell or hold the bonds to maturity, depending on the record.

These developments come as investors are already on the lookout for default risk from other Chinese real estate companies.

Moody’s carried out 32 negative rating actions in the Chinese real estate sector in the four weeks that ended on October 26.

The rating agency noted in a report in late October that rated developers will have to pay or refinance tens of billions of dollars in debt over the next 12 months: $ 33.1 billion in listed onshore bonds in mainland China and $ 43.8 billion offshore bonds Bonds denominated in US dollars. The figure includes bonds maturing and those subject to put options, or the right of investors to sell.

Central government officials have sought to reassure markets and have said in recent weeks that Evergrande is an isolated case and that the real estate industry as a whole is doing well.

Evergrande avoided the official 11th hour default in late October and began reporting progress on its construction plans. The property developer said on Wednesday it completed deliveries of projects involving 57,462 apartment owners from July through October.

However, the pace of deliveries has generally slowed month over month. Deliveries covered 39 projects and 7,568 apartment owners in October, up from 48 projects and 7,808 owners in September, the company said.

Evergrande faced another deadline last Saturday to repay bond investors. The company was China’s second-largest developer in terms of sales last year, but fell to fourth this year in the third quarter, according to industry data site China Index Academy.

Caught in a negative loop

“Our view is that right now the real estate market is caught in a negative credit loop,” Franco Leung, associate managing director of Hong Kong-based Moody’s Investor Service, told CNBC in a telephone interview this week. last.

Regulators’ call for developers to reduce their debt has made onshore investors and lenders less willing to provide finance, Leung said. Developers – especially those who are financially weaker – then had to cut back on spending on land or construction costs, resulting in lower sales, he added.

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As business slows down for some developers, investors will choose to put their money elsewhere.

A change in government policy or longer-term reductions in developer spending on land and construction can break this “negative loop,” Leung said, adding that it will take time.

Moody’s has no opinion on the possibility of such a breach occurring. The company’s outlook for real estate in China is negative for at least three to six months, he said.

S&P Global Ratings predicts a 10% drop in residential sales in China next year, and a further 5-10% drop in 2023.

“Defaults will rise as the bear cycle persists under the shadow of sluggish sales, tighter funding channels and more cautious lenders,” S&P analysts said in an Oct. 27 report.

The bright spots of real estate

Not all Chinese real estate developers are in such dire straits.

For the first three quarters of the year, Moody’s noted that the top three developers in terms of year-over-year contract sales growth recorded significant sales gains.

  1. Greentown China Holdings, + 76%
  2. Powerlong Real Estate Holdings, + 42.8%
  3. Hopson Development Holdings, + 35.3%

Powerlong and Hopson had not violated any of the government’s “three red lines” in the first half of this year, while Greentown had violated one, according to Natixis.

“Short term, [the regulation means] there will be a tightening of liquidity, ”said Ng of Natixis. “In the long run this will improve the overall financial health of the entire real estate industry as there will be consolidation if we see some of the weaker players… sell their assets.

Regarding the implications for the real estate sector and the Chinese economy, he said the risk is limited as homebuyers are unlikely to want to give up properties or mortgages they have already paid for. Since most apartments in China are sold before completion, a major challenge for cash-strapped developers is to complete construction and deliver properties to buyers.

For bondholders, “you feel like your bonds are dropping to 80%, 90%. But for homebuyers, the real estate industry itself, we haven’t seen a big change … in terms of of financial risk, ”said Ng.

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