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China property market may see more pain, though Evergrande crisis may ease


Models of homes are displayed at the Dalian World Expo Center’s 2021 Dalian Autumn Real Estate Fair, October 15th 2021 in Dalian Province.

Visual China Group | Visual China Group | Getty Images

BEIJING — Worries about Chinese real estate developers’ high debt levels have rattled investors despite signs that property giant China EvergrandeIt may be moving forward with its efforts to resolve its debt issues.

Analysts told CNBC that it is a sign of more pain in China’s real estate market.

Global investors have closely followed the developments since last summer. Evergrande’s ability to stave off official default — and are concerned about whether the fallout might spread to the rest of China’s real estate industry.

Other developers of major importance have reported similar liquidity problems over the past several days.

Last week, the majority of Chinese property stocks traded in Hong Kong fell. Evergrande lost 1.3% last week, and was one of the most affected.

IHS Markit reported that the Markit iBoxx index of China real estate high-yield bonds dropped 11.5% last Wednesday.

In a telephone interview, Gary Ng (Asia-Pacific economist, Natixis) stated that the market was “a little more concerned” on Thursday. He mentioned how stricter regulations regarding debt have limited liquidity which has led to greater development.

Ng stated that “we still believe the majority of the stress” will come from companies within the private sector, “on smaller developers and in high-yield spaces.” The general investment grade or state-owned developers [space]These seem to be quite stable.”

Natixis reports that only five out of the 20 largest Chinese real-estate developers, in assets and revenue, were central government-owned companies.

Three developers who caught the attention of investors recently don’t fall under this category.

Natixis says Evergrande, the biggest issuer in U.S.-dollar-denominated high return bonds, is Evergrande.

Kaisa Group HoldingsThis is the second-highest ranking high yield bond issuer, suspended trading in its Hong Kong-listed shares FridayBefore the stock exchange opened. After news of a missed payment on its wealth management product, shares fell by nearly 13% within a week.

Another large Chinese developer, Shimao Group HoldingsFriday’s trading was 14% higher in Hong Kong for the. In a Thursday filing, the company stated that only institutional investors will be allowed to purchase seven Shanghai-traded bonds. This change is effective Friday. According to the filing, existing retail investors will need to either sell or retain the bonds until their maturity.

Investors are already worried about the possibility of default. These developments occur as these investors have been alert. other Chinese real estate companies.

Moody’s issued 32 negative ratings actions on the Chinese property sector within the time frame of four weeks ended October 26th.

The rating agency reported in October that the developers being rated will be required to refinance or pay off tens billions in debt over the next twelve months. This includes $33.1 Billion of bonds issued in China and $43.8 Billion of bonds in U.S. dollars offshore. This figure does not include bonds that are maturing or those with put options. Investors have the right to also sell these bonds.

Officials from the Central Government have tried to calm markets, and stated in recent weeks that they had received assurances. Evergrande is an isolated case and the real estate industry overall is fine.

Evergrande avoided default in the last minute of October and started to make progress with its construction projects. On Wednesday, the property developer stated that it had completed project deliveries involving 57,462 apartment ownersFrom July through October

However, deliveries have been slower month-over-month. The company stated that deliveries in October covered 39 apartments and 7,568 owners, a decrease of 48 apartment owners and 7,808 in September.

Evergrande was again faced with a deadline to pay bond investors last Saturday. According to China Index Academy, the company had been the 2nd-largest Chinese developer in terms of sales, but it fell to 4th this quarter.

You are caught in a negative loop

Franco Leung from Hong Kong, associate managing director at Moody’s Investor Service said that the current property market was in a negative-credit loop. He made this statement to CNBC during a last week phone interview.

Leung stated that regulators’ calls for developers to lower their debt have led to investors and lenders being less inclined to lend financing. Developers — particularly those that are financially weaker — then had to reduce their spending on land or construction costs, resulting in a drop in sales, he added.

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As developers experience difficulties in business, some investors may choose to invest elsewhere.

Leung indicated that either a change in government policy or reductions by long-term developers to land and construction spending can stop this “negative loop.” However, it may take time.

Moody’s does not have an opinion on the possibility of such a deal. He said that Moody’s view on China property was negative for the next three to six month.

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

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

Real estate bright spots

However, not all Chinese real-estate developers are in this dire situation.

Moody’s has noted that sales of top-three developers in the first quarter of this year were up significantly year over year.

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

Powerlong, Hopson and Greentown did not break any of the “three redlines” of government as of half-year. Greentown however had broken one.

“In the immediate run [the regulation means]Ng, from Natixis stated that there would be liquidity shortages. It will benefit the financial health of the entire property sector in the long-term because consolidation will occur if some of the less successful players are forced to liquidate their assets.

His comments on the impact of China’s economic growth and the real estate sector were a bit more revealing. the risk is limitedHomebuyers are unlikely to want to part with properties and mortgages they already own. Because most apartment buildings in China have been sold prior to completion, cash-strapped developers face a significant challenge to complete construction and hand properties over to potential buyers.

Bondholders feel that their bonds are dropping 80% to 90%. Ng stated that homebuyers and the real-estate sector have not seen much change in financial risks.