Fresh drama at property developers including China Evergrande Group is jeopardizing President Xi Jinping’s latest efforts to end the housing crisis.
(Bloomberg) — Fresh drama at property developers including China Evergrande Group is jeopardizing President Xi Jinping’s latest efforts to end the housing crisis.
Just as China enters a key holiday sales season, a raft of headlines are weighing on already-frail confidence in the property market. Evergrande said it has to revisit its debt restructuring plan and a unit missed a yuan bond payment. Former executives at the defaulted real estate giant have been detained, Caixin reported. Meanwhile, China Oceanwide Holdings Ltd. said it is facing liquidation and Country Garden Holdings Co. is still trying to avoid a potential default.
The news, which contrasts with a slew of recent government measures to prop up housing demand, has fueled investor confusion over whether authorities have a unified plan to stabilize the market. It couldn’t come at worse time for Chinese developers counting on the upcoming Golden Week holiday period to spark a long-awaited revival in home sales.
“Any setback in the process will negatively affect the still very fragile market sentiment of almost all players in the sector and defeat the policy purpose,” said Zhi Wei Feng, a senior analyst at Loomis Sayles Investments Asia Pte.
A Bloomberg Intelligence gauge of Chinese developer shares fell 1.2% on Tuesday, a day after dropping the most this year as the crisis at Evergrande entered a new phase. The developer scrapped key creditor meetings and said it must rethink its debt overhaul plan, raising the risk of a liquidation of the nation’s most indebted builder.
On top of that, Caixin reported that Xia Haijun, an ex-chief executive officer of Evergrande, and Pan Darong, a former chief financial officer, have been detained by Chinese authorities.
The eight-day national holiday starting Friday is the centerpoint of the industry’s September-October busy season. The stakes are higher than ever this year, as the housing slowdown weighs on China’s economic recovery and developers that are struggling to refinance rely on cash from sales to meet debt obligations.
“Property sales this year have been very lackluster, so for most developers accelerating transactions in the two months will be especially crucial,” said Zhang Hongwei, founder of Jingjian Consulting, which advises real estate companies. If sales aren’t good enough by October, local governments will roll out more stimulus, Zhang added.
An easing of mortgage restrictions at the end of August triggered a spurt of home sales in larger cities that is already losing momentum. That’s prompting speculation policy makers will need to do more to revive sentiment which has been hammered by worries over unfinished apartments, falling property values, high unemployment and dwindling incomes.
Homebuyers “need to have sufficient confidence that the houses that they buy will be delivered a year later,” said Charles Chang, Greater China country lead at S&P Global Ratings. “Since many developers in large parts of the market are in distress, many homebuyers are likely to just put off their home purchases.”
Some builders are already taking aggressive steps to get customers.
One developer in Guangdong is offering incentives to buyers of its Royal Skyrim apartments in Shenzhen to purchase additional properties elsewhere in the province.
Thirteen developers from Harbin, the capital of China’s northernmost province, went to the eastern city of Nanjing to promote their 21 projects earlier this month, hoping that buyers fond of traveling would consider them as holiday residences.
Local authorities are helping out, too. A city government in central Anhui province gave out 5,000 spending vouchers of as much as $137 each to homebuyers.
Local authorities have been following each other to stimulate housing demand in recent weeks. Some have loosened rules banning non-residents from purchasing property there.
Guangzhou made such a move in some urban areas last week, marking one of the most significant steps taken in a tier-one city. Beijing and Shanghai still restrict non-locals from buying property and place limits on how many units each household can own.
“Whether tier-one cities will step up loosening depends on how much their housing markets recover,” said Chen Wenjing, associate research director at China Index Holdings. “The Guangzhou move signals that it’s not impossible anymore.”
Easing in big metropolitan areas may do little to fix the slump elsewhere, however. Developers in lower-tier cities are likely to see weak sales and cash flows “for a prolonged period if the trend of demand channeling into top-tier cities and prime locations persists,” said Karl Shen, an analyst at Fitch Ratings.
There are entrenched barriers to a recovery that measures to fuel demand can’t easily overcome. As well as the tough job market, China’s aging population and an oversupply of housing limit the upside for investing in real estate.
Former People’s Bank of China policy maker Li Daokui said a recovery may take as long as a year and Beijing should do more to encourage lending to cash-strapped developers.
What Bloomberg Intelligence Says:
New-home inventories, at over decade-highs in tier-2 and -3 cities, suggest pricing pressure is likely to stay, while surging listings of existing homes indicate heavy supply in that market.
—Kristy Hung, BI real estate analyst
Click here for the note
Officials are treading a fine line on how far to push stimulus. While a persistent real estate slump poses risks to the government’s growth target of 5% this year, it wants to reduce the economy’s reliance on a leverage-driven property market in the long run.
For now, the expectation that home values will keep falling is among the biggest deterrents to buyers. Home prices dropped the most in 10 months in August, led by declines in smaller cities.
“It is more or less a waiting game now,” said Chang at S&P. “We’re going to enter a seasonally slow time for home sales as soon as we get into the winter.”
–With assistance from Pearl Liu.
(Updates with analyst comments in the 10th, 18th and last paragraphs.)
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