Property investment in China has long been tied to the country’s high-speed economic growth. China’s real estate sector and related industries account for nearly one third of the country’s overall gross domestic product (GDP), according to a recent research paper. However, in 2021, China’s property market is facing severe challenges after the crisis at China Evergrande Group, the world’s most indebted real estate company.
With more top indebted developers missing payments, sentiments towards the property sector in China have turned negative. As per Bloomberg October estimates, Chinese borrowers have defaulted on about $9 billion of offshore bonds in 2021 – and the real estate sector accounts for one-third of it.
This has led major international ratings to downgrade Chinese developers, whose dollar bonds have lost about one-third of their value this year.
The sector is further burdened by the fact that Chinese banks tightened financing rules for mortgage lending, to curb debt-fueled risks.
Trend reversal in China’s property sector
There has been continued news of uncompleted real estate property projects out of China. The country was once a red-hot property market, where more than 900 million square meters of apartments were being constructed per year, according to offical data. However, amid tight funding for real estate development, China recorded a major 33% yearly decline in newly started housing projects in October.
According to Reuters calculations, new-home prices in 70 Chinese cities slid 0.25% in October from September — its first decline registered since March 2015. Home sales and land acquisition are declining across the country, leading major cities in China to slash prices of the plots by up to 20%. The residential sales in the wider property market also declined 24% in October.
Developers in distress, default fears remain
China’s stressed real estate developers ultimately relied on selling property projects for capital and borrowing heavily to fund growth as well as refinance maturing debts. Amid falling sales and loan pressure, real estate companies are currently suffering a major cash crunch, leading to unprecedented losses and subsequently financial meltdowns.
Overall, 20 of the top 30 troubled Chinese property firms by sales have crossed at least one of three debt ‘red lines’ outlined by the Chinese government, according to Bloomberg figures.
China’s developers are facing nearly $1.3 bn worth in bond payments due this December – following $2 bn in November, with no defaults reported.
Investors are still expecting debt restructuring at the troubled Chinese developer Evergrande which has failed to pay coupons totalling $82.5 m due on November 6 and has to meet its obligations before a 30-day grace period ends on December 6. In recent news, Evergrande’s land zoned for building a football stadium in Guangzhou city has been reclaimed by the government for auction.
Shenzen-based Kaisa Group Holdings – China’s third-largest borrower of dollar bonds among property firms – recently has announced plans for paying back wealth management products, and US-listed offshore debt originally due in December. Kaisa has a $400 m note due December 7, and $12.9 m due in interest payment.
Another once deep-pocketed Chinese developer, Fantasia Holdings has filed a winding-up petition against its major subsidiary Fantasia Investment Holdings in connection with an alleged outstanding loan of $149 m. Meanwhile, it has won approval to delay the early redemption of a local bond by two years. The developer missed a payment of $205.7m in October. Besides Fantasia, other developers like Sinic and China Modern Land have also defaulted on their debts in October.
In the meanwhile, billionaire owners of Chinese real estate firms such as Evergrande, Sunac China Holdings, Guangzhou R&F Properties, Shimao Group Holdings and CIFI Holdings Group, have dipped into their own pockets to meet their debt obligations and save their troubled firms from default. From selling luxury assets to stakes in their listed companies, these Chinese developers have together gathered at least $3.8 bn, Bloomberg reported last week.
Property market troubles weighing on China’s economy
Many economists expect the property slump to weigh on China’s economic outlook for the next year. “The footprint of China’s real estate sector has become so large – with an impact of real estate production and property services on GDP of 29% – that it is hard to see how a significant slowdown in the Chinese economy can be avoided even if banking problems were contained,” says Harvard Economics Professor Kenneth Rogoff.
Multinational banks like Goldman Sachs, Nomura, Bank of America, Citigroup and Barclays have cut their 2022 growth economic forecasts for China to below 5%.
Recent reports also eroded hopes of stabilizing the financial rules on the property sector. In November, China’s banking regulator – China Banking and Insurance Regulatory Commission – said it is sticking to its deleveraging line, to curb the ‘financialization of real estate’ and prevent bubbles in the real estate sector.
For Q4 2021, Tommy Wu, Economist at Oxford Economics, expects industrial and economic growth to slow further, amid the real estate slowdown and another Covid outbreak. Wu expects industrial production growth to be hit heavily by the downturn in the real estate sector, due to its strong backward linkages to heavy industry.
However, according to Wu, China’s property downturn will be significant but contained. “Banks have started to relax restrictions on mortgage lending and loans to property developers. We expect that the policymakers will continue to adopt an easier overall credit policy stance to support growth.”