Evergrande’s woes reflect broader problems in China’s real estate sector


Hopes that Evergrande’s default will not turn into a broader housing market downturn appear to be fading quickly. The latest data from various private sources shows that home sales in China fell sharply in September, which is traditionally a strong month for the real estate industry.

According to data seen by Capital.com, at least six major real estate developers reported a more than 20% year-over-year drop in sales for the month of September.

Among the major listed real estate developers, China Resources Land said on Tuesday that its sales fell 28.2% in September, Country garden recorded a 29.35% drop in sales, Sunac sales plummeted 32.33%, Longfor group sales fell 32.76%, Shimao group sales fell 29.9%, China Vanke reported a sales decrease of 33.79% and China Overseas Land & Investment recorded a sales decrease of 41.6%.

Fall in sales in September

Last week, several new sources cited data from China Real Estate Information Corporation which showed that China’s top 100 real estate developers reported a 36% drop in sales in September. While over 90 of the top 100 developers reported a drop of over 30% year over year.

The slowdown in sales and the generally gloomy mood towards the Chinese real estate sector has already led to an increased number of credit rating downgrades.

Since the beginning of September, S&P has deteriorated; Central China Real Estate, Guangzhou R&F Properties, Jiangsu Zhongnan Construction, Fantasia and Sinic, while Fitch lowered the ratings on; Xinyuan Real Estate, Guangdong – Hong Kong Greater Bay Area Holdings, Fantasia and Sinic.

Debt repayments missed

Of these, Fantasia has already missed debt payment deadlines and Sinic said on Tuesday that he would not have enough financial resources to make payments on the principal and the last interest payment on a 2021 bond. of $ 250 million due October 18.

The Chinese government has so far looked aside. Aside from the cash injections by the People’s Bank of China to help support the stock markets and central bank insurance to support the real estate sector, there has been little policy action.

Despite growing signs of distress in China’s real estate sector, experts are still betting against a collapse of the country’s real estate sector and financial system. Instead, they expect the government to step in and prevent a crisis.

An aerial view of a suburban residential area in the Jinqiao community of Pudong, Shanghai, China – Photo: Shutterstock

Slow down to continue

“There are signs of a slowdown in the physical (real estate) market in the second half (of 2021) and a prolonged slowdown for the remainder of the year could lead to easing measures from the government next year,” said Lorraine Tan, director of Morningstar. of research on equities in Asia, said Tuesday during a webinar.

According to Elliot Clarke, senior economist at Westpac, there will be no “material lasting effect” on investor appetite for the Chinese economy as a whole.

“The ability of the Chinese authorities to relieve stress in the markets is unparalleled,” he added.

The three red lines

But what will not happen is that China relaxes the so-called “three red lines” rule. This trio of measures restrict the access of real estate developers to bank loans unless they reach thresholds on; liabilities / assets, net debt / equity and cash / short-term debt.

“We believe that the overriding political principles of the current strict political environment, exemplified by the three red lines, would continue to persist,” Morningstar’s Tan said.

Rules played an important role in the collapse of Evergrande, but according to Clarke of Westpac, the ultimate goal is to “reduce debt and improve profitability” of the industry, which is clearly positive for the health of the industry. long term of the sector.

Real estate companies “soar”

However, not everyone is convinced that the real estate sector is immune from a sustained downturn. According to S&P Global Ratings, the three red lines have left several real estate companies “under pressure”.

“We see a risk that a disorderly correction in the real estate market could lead to sharp price declines, affecting the personal wealth of homeowners. Such an event could also contribute to the large-scale losses of investors in wealth management products, as well as contractors and service companies that support developers, ”S&P said in a note Wednesday.

Mark Williams, chief economist for Asia at Capital Economics, however, says the problems Evergrande is facing extend beyond the short term. In a recent memo, he said the struggles of struggling real estate developers reflected a secular change in the Chinese economy.

Construction will slow down “significantly”

“At the root of Evergrande’s problems – and those of other heavily indebted developers – is that demand for residential properties in China is entering an era of sustained decline. Relaxing regulatory controls on the sector would not change this fundamental constraint.

“Construction, a key driver of growth and demand for raw materials in China, will slow considerably over the next few years, whether the economy escapes the current crisis or not. “

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