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

People look at models of houses at Dalian Fall Real Estate Fair 2021 at Dalian World Expo Center on Oct.15, 2021 in Dalian, China’s Liaoning Province.

Liu Debin | Visual China Group | Getty Images

BEIJING – Concerns over high debt levels among Chinese real estate developers have unsettled investors amid signs that real estate giant China Evergrande may make headway in resolving its debt problems.

This is an indication of further pain in the Chinese real estate market, analysts told CNBC.

Since late summer, global investors have been watching Evergrande’s ability to stave off an official default – and worried whether the impact could spread to the rest of China’s real estate industry.

Other large developers have also reported liquidity issues in the past few days.

Trading in Chinese real estate stocks in Hong Kong largely declined last week. Evergrande was among the least affected, losing about 1.3% on the week.

On the debt front, the Markit iBoxx index for Chinese high-yield bonds fell 11.5% last week, according to IHS Markit.

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

“We still believe that most of this stress will be in the private sector and” smaller developers and the high-income sector, “Ng said. “State-owned developers or the general investment grade [space]that seem pretty stable. “

According to Natixis, in the first half of this year, only five of China’s top twenty real estate developers by wealth were central government-owned.

The three developers who have been drawing investor attention lately don’t fall into this state category.

Evergrande is the largest US dollar-denominated high-yield bond issuer in the industry, according to Natixis.

Kaisa Group Holdings, which ranks second among these high-yield bond issuers, suspended trading of its Hong Kong-listed shares on the Friday before the stock market opens. The developer’s shares were already down nearly 13% on the week after it was revealed they missed payment for an asset management product.

Another big Chinese developer, Shimao Group Holdings, traded around 14% lower in Hong Kong on Friday. The company announced in a filing on Thursday that as of Friday it will only allow institutional investors to buy seven of its Shanghai-traded bonds. Existing retail investors must sell or hold the bonds to maturity, the filing states.

These developments are due to the fact that investors are already assessing the default risk of other Chinese real estate companies.

Moody’s took 32 negative ratings in the Chinese real estate sector in the four weeks ended October 26th.

The rating agency found in a report in late October that the rated developers will have to pay or refinance tens of billions of dollars in debt over the next 12 months: $ 33.1 billion in mainland China-listed onshore bonds and 43 , $ 8 billion in offshore bonds US dollar denominated bonds. This includes bonds with maturity and bonds that are subject to put options or investors’ right to sell.

Central government officials have tried to calm the markets, saying for the past few weeks that Evergrande was an isolated incident and that the real estate industry as a whole was fine.

Evergrande avoided an official default at eleven o’clock in late October and began announcing progress on its construction projects. The developer announced on Wednesday that it had completed project deliveries with 57,462 apartment owners between July and October.

However, the pace of deliveries has generally slowed month by month. Deliveries affected 39 projects and 7,568 homeowners in October, up from 48 projects and 7,808 homeowners in September, the company said.

Evergrande faced another deadline last Saturday to repay bond investors. The company was the second largest Chinese developer by revenue last year, but dropped to fourth this year from the third quarter, according to industry data site China Index Academy.

Caught in a negative loop

“We believe the real estate market is currently in a negative credit loop,” Franco Leung, associate managing director of Moody’s Investor Service in Hong Kong, told CNBC last week in a telephone interview.

Regulators’ call for debt reduction has made investors and onshore lenders less willing to provide funding, Leung said. Builders – especially financially weaker ones – then had to cut their spending on land or construction costs, which led to a drop in 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 developer cuts in land and construction spending can break this “negative loop,” Leung said, adding that it will take time.

Moody’s has no opinion on whether such a break would even happen. The company’s outlook for China real estate is negative for at least three to six months, he said.

S&P Global Ratings forecasts a 10% decline in home sales in China next year and a further 5 to 10% decline in 2023.

“The defaults will increase as the downward cycle continues amid sluggish sales, tighter funding channels and more cautious lenders,” said S&P analysts in an October 27 report.

Bright spots in real estate

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

For the first three quarters of the year, Moody’s found that the three largest developers posted significant year-on-year sales growth after contracted sales growth.

  1. Greentown China Holdings, + 76%
  2. Powerlong real estate investments, + 42.8%
  3. Hopson development holdings, + 35.3%

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

“In the short term, [the regulation means] there will be a liquidity squeeze, “said Ng of Natixis.” In the long run this will improve the overall financial condition of the entire real estate sector as it will consolidate when we see some of the weaker players … forced to “sell theirs.” Capital.

As for the impact on the real estate industry and the Chinese economy, he said the risk is limited as homebuyers are unlikely to want to forego real estate or mortgages for which they have already paid. With most homes in China being sold before completion, a major challenge for insolvent property developers is completing construction and delivering properties to buyers.

For bondholders, “You feel like your bonds are falling 80, 90%. But for the homebuyers, the real estate sector itself, we haven’t seen much of a change … in terms of this financial risk, ”said Ng.

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