By Clare Jim

HONG KONG (Reuters) – The debt crisis engulfing China Evergrande Group has begun to dent homebuyer sentiment and force developers to cut prices, signalling deeper consequences for the world’s No.2 economy and a consolidation in the overcrowded property sector.

Evergrande is the epitome of the borrow-to build business model. It has accumulated less than $305 billion in debt, and it has stopped paying some suppliers and investors. This has caused a halt to construction work on many projects throughout the country.

China’s largest corporate problem has quickly become Evergrande, which is struggling to finish home development projects for its customers.

Global financial markets have been hit by contagion worries from Evergrande’s collapse, but analysts believe that the most vulnerable sector in the country, the property industry, accounts for 25% of its gross domestic product could be worst affected.

It’s not China’s Lehman moment we need to be concerned about. Capital Economics chief Asia economist Mark Williams spoke out about the sharp decline in property sales. Williams was speaking to Mark Williams, who was talking about Lehman Brothers’ 2008 collapse.

Evergrande fell short of a deadline for payment on Friday. This is one of the most clear indicators that Evergrande, whose financial woes have caused panic in markets, may default.

To ease tensions in the community, Evergrande is currently repaying its suppliers and retail investors through opaque wealth management products.

General manager of Centaline Shenzhen, Alan Cheng said that it isn’t the first time that a developer uses real estate to pay suppliers. But it is the first time that homebuyers have realized that a large developer such as Evergrande could collapse – this suggests there may be something wrong in the market.

The market was in a downward trend, Cheng said. He stated that buyer sentiment turned pessimistic. This led to lower transaction volumes.

Cheng reported that Kaisa and China Resources Land (state-backed developers) have cut their selling prices for Shenzhen after Evergrande offered a 30% discount in May.

Kaisa denied that they had any comment about price drops, but China Resources Land didn’t respond to a request for comment.

China’s growth in property sales per floor area declined to 15.9% in eight months from one year ago, while it experienced 21.5% growth over the same period. The sector was also hard hit by liquidity constraints. In the first two months 2021, growth was 105% year on year. This is an increase from a low baseline in 2020 after sales suffered due to the COVID-19 epidemic.

CONSOLIDATION DRIVE

Nomura said the decline in new home sales accelerated in the first two weeks of September from August to 16%, and 49.5% from a year earlier for top and lower tier cities, while they eased to 15.5% for tier-2 cities.

Julian EvansPritchard from Capital Economics, senior China economist said Evergrande’s economic crisis had had more impact than expected on housing demand. Households had become much more cautious which caused a fall in prices.

While most developers could handle six-monthly weaker sales, an even greater shift in property sales due to negative sentiments would prove more concerning.

Analysts said that the sector would see consolidation to withstand the crisis.

China’s property sector has always been very fragmented. There were an estimated 50,000 developers in the peak. Analysts said that Beijing wants to consolidate the market, as many of them were poor-quality and small.

No.3 developer China Vanke and Guangzhou-based KWG Group said in their earnings conferences last month they were eyeing M&A to acquire land from distressed peers, when prices are often cheaper than at public land auctions.

Vanke stated that it was in discussions with Evergrande over the last few months regarding project cooperations and has already acquired three Sichuan Languang Development projects, which were a smaller developer who defaulted on July.

Country Garden Services, the property management unit of developer Country Garden, said on Monday it had agreed to buy Wealth Best Global, an arm of Guangzhou R&F Properties Co, for 10 billion yuan ($1.55 billion).

An executive from a Chinese developer said that consolidation will accelerate in the current credit climate. He also stated that they were looking into a few projects right now.

According to an executive who declined to give his name because he was not authorized to, “If a company is in liquidity crunch, they don’t sell their assets fast when the problem first arises, it might collapse like Evergrande.”