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The property industry in China is in crisis.

by Seerat Fayaz   ·  February 19, 2022   ·  

The property industry in China is in crisis.

by Seerat Fayaz   ·  February 19, 2022   ·  

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As the cash crunch for developers worsens, so does the housing slowdown, which has become one of China’s most significant drags on the economy. Trying to deflate a speculative market is a risky strategy that, if not managed properly, could jeopardise Beijing’s pledge to prioritise economic stability this year. Regulators have quietly tweaked some rules to engineer a soft landing for the real estate industry, such as encouraging mergers and acquisitions, but officials have resisted any substantive easing of restrictions thus far. 

This week, a Bloomberg index of Chinese junk dollar debt fell every day from Monday to Thursday, pushing yields above 20%. Even after rallying on Friday, a gauge of Chinese property shares is down 3.4 percent this week, bringing its losses over the past year to 28 percent. Almost a year after China’s property-market debt squeeze triggered the first wave of developer defaults, the industry is fighting for survival. 

Home sales continue to fall, and rising borrowing costs mean that offshore refinancing is out of the question for many developers. Global rating agencies are withdrawing their ratings on property bonds, while a string of auditor resignations raises concerns about financial transparency just weeks before earnings season. A sudden 81 percent drop in the Hong Kong-listed shares of one real-estate firm has raised concerns about the possibility of margin calls.

While the government has become more supportive, the measures have been marginal and have not resolved the liquidity crisis. Traditional investors have been pushed to the sidelines as a result of the market turmoil and ongoing uncertainty.

Meanwhile, China Fortune Land Development Co. failed to repay a $530 million bond due on February 28, 2021, becoming the country’s first real estate firm to default since Beijing imposed new financing limits on the sector in 2020. According to a Feb. 3 report by Standard Chartered Plc, at least 11 developers have defaulted since then. 

More may come. Property firms must find nearly $100 billion in debt repayment this year, despite shrinking income streams. According to preliminary data from China Real Estate Information Corp., sales at China’s 100 largest developers fell about 40% year on year in January, compared to a 35% drop in December. 

Developers are selling more onshore bonds to fund project construction, but not nearly enough to cover maturing debt obligations.

According to China International Capital Corp., onshore issuance by Chinese developers fell 53% in January to 23 billion yuan ($3.6 billion), while dollar note sales fell 90% year on year to $1.6 billion. CICC analysts led by Eric Yu Zhang wrote in a Friday note that net financing, which subtracts maturities from issuance, was a negative $7.3 billion. 

Investors should also be concerned about off-balance-sheet debt. Shimao Group Holdings Ltd., a fallen angel, recently proposed deferring repayment of approximately 6 billion yuan of high-yield trust products due between this month and August, according to people familiar with the matter this week. Its bonds fell in value as investors worried that the company would prioritise these liabilities over money owed to offshore creditors.

Auditor resignations raise further concerns about the financial health of real estate firms. Hopson Development Holdings Ltd. and China Aoyuan Group Ltd. auditors resigned in late January, citing insufficient information and a fee disagreement, respectively. For the first time in 27 years, Shimao’s onshore unit changed auditors. Failure to publish results by the March 31 deadline set by the Hong Kong stock exchange may result in lengthy trading halts. 

Investors’ mistrust of management is growing. Rumors of various companies going bankrupt are also spreading. 

Authorities are taking steps to ease funding restrictions for the sector, but these are mostly targeted and incremental rather than broad-based.

According to multiple local media reports in the last week, the government recently issued rules to standardise the use of presale funding, banks extended more loans to the sector, and some lenders in several cities reduced mortgage downpayments. 

Following the mortgage report, a Bloomberg Intelligence index of Chinese real estate stocks rose as much as 3% on Friday, while high-yield dollar bonds halted their decline. 

Nonetheless, credit stress remains “acute,” and funding channels aren’t improving much, according to analysts. 

As a result, defaults are likely to pile up for developers who are unable to sell assets quickly enough. State-owned enterprises have emerged as potential buyers, though the pace of transactions has been slow thus far.

Any distressed-debt investor who buys defaulted bonds now will most likely face a lengthy wait before recovery. Only Fortune Land, one of the year’s defaulters, has released a preliminary debt restructuring framework. According to Standard Chartered, there is an estimated $48.9 billion in pending debt resolution. 

While Chinese authorities have directed state-owned bad-debt managers to assist in the restructuring of weak developers, it is unclear what such assistance might imply for bondholders. According to Bloomberg data, court-ordered restructurings are uncommon in China’s real estate sector. Since 2018, 27 companies have failed to honour their bonds, with only two going through the process.

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