China is a mute witness to foreign investors buying property on its mainland as the country faces a foreclosure of properties because of thousands of defaults by developers on account of a government crackdown on speculation and a slowing economy.
Apart from the crackdown and the economic slowdown, the developers’ market also floundered because of protests by homeowners against stalled construction projects and threats of mortgage boycotts.
Singapore is leading the buying the spree. According to media reports, sales of Chinese distressed properties, including office buildings and factories, hit a quarterly record of $1.93 billion in the last three months of 2022, according to MSCI, an American finance company, up 14% from the same period a year earlier and 73% higher than in 2019, the first year it tracked such data.
Business media quoted Benjamin Chow, head of Asia real assets research at MSCI, as saying that “foreign buying has been more pronounced during this property downturn than in past ones in China”. He linked the wave of developer defaults to a series of policies begun in 2021 to bring down leverage in the financial system.
Singapore government-backed CapitaLand Investment highlighted the foreign interest in distressed Chinese properties in February when it raised a 1.1 billion Singapore dollar ($820 million) fund to hunt for bargains in the Chinese commercial property sector.
One of the biggest distressed deals on the mainland came in October when CapitaLand agreed to pay 2.04 billion yuan ($290 million) for a Beijing office building sold at auction after a default by Te Er Te, a property management company owned by Dalian-based developer Yongjia Group, court records show. The price represented a 30% discount from its 2021 valuation.
In January, a Singapore-headquartered private equity manager with about $7 billion of assets under management signed a deal with a Taiwanese manufacturer to buy a bankrupt logistics facility in China, said an executive with the buyer who asked not be named because he is not authorized to speak with the media.
Some Western investors, including Brookfield Asset Management and Pictet Wealth Management, have also shown interest in such deals. Alexandre Tavazzi, Pictet’s managing director, said in Hong Kong last month that distressed properties in China have “become quite attractive.”
However, MSCI’s Chow said other global investors have been more reluctant to invest in Chinese properties because of “concerns about long-term returns, particularly with China’s lower trajectory as it moves away from a reliance on the real estate sector to bolster GDP growth.”
China’s property sales plunged in 2022 by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings. National property sales probably dropped by over 20 per cent in 2022. Adding to the confusion, since last June, there was a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments.
Most homes in China are sold before completion, generating an important source of cash flow for developers. The businesses have struggled to obtain financing in the last two years as Beijing cracked down on their high reliance on debt for growth.
The mortgage ban threat damaged the already weakening market confidence with foreign investors eyeing developers’ properties to grab them at cheap rates.
A Bloomberg report in April, however, saw some relief for China with price increases of properties being noticed in several cities from February onwards. Of the 70 major cities tracked by the government, 55 had price increases in February, versus only 15 in December. The share of households saying they plan to buy a home in the next quarter rose to 17.5 per cent, the first meaningful uptick in three years, according to the central bank’s latest survey.
The media report observed that Chinese families have not given up on the idea of building their wealth through property yet. For most Chinese, owing a property is among their ultimate aims in life and they may invest all their savings to buy a roof over their head. After China pulled out of the Covid lockdown, the people, though traumatized economically, are said to be coming back to realizing their dreams — that could be the blessing in disguise the developers may be wanting.
The developers began to get hurt financially when Beijing began strong-arming builders to restart stalled developments, so they can deliver pre-sold flats to disgruntled consumers whose angry protests were begin to unnerve the government.
Zhengzhou, a city in east-central China and the epicenter of those homebuyer protests, rolled out a 10 billion yuan ($1.5 billion) fund to help developers resume projects. Some builders, including blue-chip Country Garden Holdings Co, are now in the business of construction services. Revenue as contractors is smaller but the work flow is steady.
With things looking like they might pick up, developers may now ask investors to look past 2022. Some may be able to make progress on debt repayments. Bloomberg reported: “Sunac China Holdings Ltd, a distressed builder that recently announced a restructuring plan, finally saw an uptick in contracted sales after one year of decline. Even China Evergrande Group, the world’s most indebted builder, recorded 13 billion yuan of sales in March, suggesting some resumption of its business operations. As for the more prudent ones, such as China Vanke Co, they can raise fresh equity again.”
But the good mood is yet to rub off on investors. State-backed Sino-Ocean Group Holding Ltd’s surprise decision last month to defer a coupon payment to “preserve cash,” which it reversed days later, was a wake-up call that developers’ liquidity crunch is not over. Nonetheless, hope that apartment sales are recovering is keeping bond traders from panic selling, thereby giving builders some breathing room.
China’s property sales plunged in 2022 by more than they did during the 2008 financial crisis, according to new estimates from S&P Global Ratings. National property sales probably dropped by over 20 per cent in 2022. Adding to the confusion, since last June, there was a rapid increase in Chinese homebuyers refusing to pay their mortgages across a few hundred uncompleted projects — until developers finish construction on the apartments.
Most homes in China are sold before completion, generating an important source of cash flow for developers. The businesses have struggled to obtain financing in the last two years as Beijing cracked down on their high reliance on debt for growth.
The mortgage ban threat damaged the already weakening market confidence with foreign investors eyeing developers’ properties to grab them at cheap rates.
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