More and more Chinese developers are unable to complete their construction projects. Clients do not want to wait until their promised home turns into a dreary ghost town, so they stop paying loans in protest. China’s most indebted real estate developer Evergrande Group isn’t nearing the end of its troubles. Others may share his fate.
Developers are building fewer and fewer apartments, not only in Poland. Official statistics show that in the first half of the year, apartment sales in China fell by more than 30%, and the top 100 developers cut their sales by half. Chinese developers tend to make more advanced investments with money invested in houses under construction, so the huge decline in new apartments means they don’t have enough money to continue construction work already underway. The scale of the problems is illustrated by these two figures: according to official figures, in 2005-2020, more than 150 million apartments were sold and less than 100 million were commissioned. Almost 50 million apartments were never completed, they are the whole “ghost houses”, abandoned with no hope that the builders will ever return to their premises.
Clients in a credit trap
Buying an apartment in China is now a lottery because clients don’t know if their dream home will become such a ghost. This is so dangerous that in China, as in Poland until recently, apartments are bought at the stage of a pit, and the mortgage is paid off before the keys are received. This leads to very dangerous situations when a person pays for months for an apartment, the delivery of which will be delayed or not completed at all. Although the Chinese are notorious for their criminal enforcement of the rules and rarely dare to openly oppose anything, it is even more surprising that a growing number of borrowers refuse to pay installments for apartments that are being delayed or even dubious.
It is estimated that the boycott has affected the residents of 90 cities so far and probably will not end there. S&P Global Ratings puts 2.4 trillion yuan ($356 billion), or 6.4%, at risk under the worst-case scenario. mortgages, while Deutsche Bank AG warns that at least 7 percent are at risk. housing loans. To date, publicly traded banks have reported just 2.1 billion yuan of outstanding mortgages that have been directly affected by the boycotts, according to Bloomberg.
“Banks are trapped,” Zhiwu Chen, professor of finance at the Hong Kong University Business School, told a website. “If they don’t help the developers complete their projects, they will lose a lot more. If they do, it will certainly please the government, but will increase their exposure to delayed real estate projects,” he added.
Is the government ready to nationalize some developers?
The professor noted that Chinese banks cannot afford to comfortably wait until the situation improves and customers themselves begin to pay on time. The pandemic and its economic fallout, as well as rising youth unemployment, are causing many Chinese to lose financial liquidity and regularly default or even delay their plans to buy property. Bloomberg writes that the government expects banks to play their part in running the economy safely during this turbulent period.
The Chinese government has already begun issuing orders to stabilize the real estate market: it expects local authorities to monitor developers to prevent delays in the delivery of apartments. Western media are wondering if there will be a change in strategy in the future and whether the state itself will engage in “applause” for developers. Thus, it would be possible to nationalize part of the sector, or at least on some other legal basis to ensure control over the companies that will be subject to the most censorship.
Evergrande still doesn’t know how to solve problems
In the context of the difficult situation in the real estate market in China, the question of the most indebted Chinese developer, who at one time paid much attention to foreign media, is also relevant. We are talking about Evergrande Group, which in 2020 was the second largest developer in China and sold apartments for more than 700 billion yuan, in the first half of this year - only 12 billion yuan. The company has been working on a recovery plan for the past six months, but what investors heard last Friday did not reassure them in the least. The company announced that it will use the resources of affiliated companies to restore liquidity. However, she kept silent about the fact that many of these companies are in poor condition, and also prepare various recovery plans, which do not necessarily indicate reliable information about their debts and obligations.
Source: Wprost
