Property sales in China could fall by a third this year, creating more problems for the country’s giant real estate sector as people lose faith in the market and pressure mounts on struggling developers to complete apartments pre-sold.
As the government prepares a bailout for the sector that could cost 300 billion yuan ($44 billion), experts at ratings agency S&P have concluded that the drop in sales will be twice as bad as they think. originally planned for this year.
“S&P Global Ratings now expects national home sales to fall 28% to 33% this year,” the rating said Tuesday, “nearly double the decline of our previous forecast.”
News last week that disgruntled buyers of apartments in housing projects in more than 100 cities had banded together to suspend payments on unfinished homes drew attention to the ongoing crisis.
The strike has ratcheted up the pressure on developers, who are already facing serious cash flow problems and who depend on customers prepaying for out-of-plan homes to keep money flowing into the company. The proceeds can also be used to pay debts, so the loss of that income will be hit hard.
Some top developers have already defaulted, sending waves of panic through the global financial system – including Evergrande, the country’s second-biggest property company which admitted last year it could not pay part of its $300 billion mountain of debt.
Recent home sales data indicated that steep price falls were flattening out, but that was before news of the mortgage strike prompted a revision in forecasts. S&P thinks the contagion of weaker sales and loss of confidence could drag down previously strong companies.
“This payments boycott could easily spread to other developers, in our view,” S&P said.
Separate research by the agency puts the estimated value of the loans in question at almost 1 billion yuan ($144 billion) and could threaten financial stability in the event of a sharp drop in prices, as now seems likely in a context of falling sales. The slowing economy and rising unemployment are adding downward pressure on sales and prices.
“By stopping payments, Chinese mortgage lenders are effectively pressuring banks and the government to help developers deliver the homes people have paid for,” said Yiran Zhong, credit analyst at S&P Global Ratings. .
Local land sales are also affected due to the housing downturn and the country’s draconian zero Covid policy. In the first half of the year, local land sales revenue fell sharply by 31% year-on-year. The decline could narrow in the second half, but could still remain low at -10%, due to lackluster funding from developers, according to UBS.
Beijing is clearly unnerved by recent developments. In the thinking of the Communist Party, the stability of the real estate market affects social stability. This is particularly the case in a year when President Xi Jinping is seeking an extraordinary third term as party leader at the October congress.
The most visible sign so far that authorities in Beijing are starting to respond to the crisis came on Monday with reports that the government has set up a multi-billion yuan fund to help bail out the struggling sector.
Shares of property companies rallied after Reuters reported that the People’s Bank of China (PBOC) was designing a fund of up to 300 billion yuan ($44 billion) to bail out the sector which accounts for at least 25 % of the production of the world’s second largest economy. . Chinese real estate is the largest asset class in the world and many investors fear that a sharp drop in valuations could have wider consequences for the global economy.
The fund would initially be set at 80 billion yuan, according to a source quoted by Reuters. The state-owned China Construction Bank would contribute 50 billion yuan, but the money would come from the PBOC loan facility. If successful, other banks would follow with a goal of raising up to 200-300 billion yuan, the source added.
Nervousness also in the sector as Evergrande prepares to unveil a long-awaited restructuring plan, promised by the end of July.
The company, which started as a property developer but has branched out into resorts and even electric cars, has been brought to its knees by Beijing’s crackdown on “reckless lending” that began in 2020. It defaulted on offshore bond repayments in December and is now considered in default on all of its $22.7 billion in offshore debt, and the aftershocks have rippled through China’s economy ever since.
In mainland China, Evergrande has extended its debt repayment obligations, although creditors are growing impatient. Its latest proposal to extend repayment on a 4.5 billion yuan ($666.7 million) bond was rejected this month, while small suppliers, who are owed money , are also threatening to stop repaying bank loans.
Evergrande also aimed to publish a simple restructuring plan for its onshore debt as early as this week, financial information provider REDD reported on Friday.
Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities, said Evergrande’s proposal should also outline what it will do with its unsold projects and existing land bank, which would impact directly on the real estate market in the broad sense.
“Investors will not be looking at Evergrande’s proposal just from a business perspective, but also from a macro perspective,” Cheng said.