Chinese real estate: Once-mighty developer struggles with state aid lifeline after sector’s ‘golden age’ ends

But analysts warn that even the developers on the list will have a rough few years ahead. Analysts said the landscape of China’s homebuilding business has been forever changed by a years-long liquidity crisis and a long period of weak sales. Now, as Beijing takes a more assertive stance, partially or fully state-owned companies will take the lead.

Chinese developers have been in financial trouble for the past three years, defaulting on more than $100 billion in debt. The crisis began in August 2020, when China’s “three red line” measures cut off access to bank and bond market funding as sales plummeted due to the coronavirus pandemic.

“Developers, especially private companies, will still face the challenge of survival over the next five to 10 years,” said Raymond Chen, managing director of CGS-CIMB Securities. The word “civilian” was used. , even though most are listed publicly. “Their first concern is how to survive under the pressure of debt repayments and weak sales, rather than how to develop.”

Declining sales have depleted coffers and past loans are coming due as spending is mandated by the Chinese government, which prioritizes the delivery of unfinished apartments.

Developers will continue to face large debt repayments in 2024, with the principal amount of onshore and offshore bonds maturing or puttable this year rising 11.3% year-on-year to 737.3 billion yuan, according to data compiled by Fitch. (US$103 billion). evaluation.

Even developers who avoid default will still need to repay the total principal amount of onshore debt of 39.3 billion yuan and offshore debt of 5.5 billion yuan in 2024, an increase of 25% year-on-year, with maturities peaking in March and August. exceeds 10 billion yuan. The agency said.

Last year, at least 10 Chinese developers defaulted on debt payments. For example, the country’s best-known developers, Country Garden Holdings and Sino Ocean Group, failed to repay offshore debt in August, further raising concerns that the expected recovery was a mirage.

At an internal meeting in December, company chairman Yang Huiyan, daughter of founder Yang Guoqiang, vowed that the founding family would save the company, even if it meant “breaking down the iron pots and selling the scraps.”

Yang, a former Chinese billionaire, added at a January meeting that the company will deliver 480,000 homes in 2024, after delivering 600,000 homes last year.

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China’s real estate debt crisis sparks anger as apartments remain unfinished

China’s real estate debt crisis sparks anger as apartments remain unfinished

But the challenges before Country Garden and its friends are serious.

Mo Bin, president of Country Garden, said at the meeting, “The market in 2024 is expected to remain at a low level, and the sales performance in each city and the outlook for state-owned enterprises and private companies will become increasingly divergent.” Stated.

According to Nomura’s analysis, the number of unfinished and sold homes nationwide has ballooned to 20 million. The cost to complete these units in 2024 will be 2.7 trillion yuan, even taking into account the 550 billion yuan the government has pledged to meet the delivery backlog, the investment bank said.

Meanwhile, both Goldman Sachs and UBS expect U.S. home sales to fall 5% this year compared to a year ago, although the decline is smaller than the 10% decline in 2023. will be under even more pressure. International rating agencies such as S&P and Fitch have similar expectations.

“There is still considerable risk that further weakness in the real estate sector will affect public confidence and negatively impact domestic economic stability,” Wang Tao, chief China economist at UBS, said at a press conference. “This is the biggest risk of an economic downturn this year.”

Even if we manage to overcome the challenges of the current crisis, developers will not go back to business as usual.

Housing prices in China continue to fall, marking the first significant decline in about nine years.

“Most developers will probably have to accept the fact that the golden age of high-velocity leverage and rapid growth is over,” said Gary Ng, senior economist at Natixis Corporate and Investment Bank. Stated.

S&P analyst Ricky Tsang said these companies used to easily raise money through offshore bond markets, often at double-digit interest rates.

“Companies will take that money, buy land, pre-sell homes and move on,” he says. “But it was all based on the belief that land and housing prices can only go up.”

Developers build and sell quickly, eliminating the need to pay interest on the debt backing the project, minimizing the cost of capital for each development.

“Currently, this model is in decline, and so is the previous dominance of private companies,” Tsang said. “The high-churn business and financing models traditionally favored by private companies are no longer sustainable.”

Zhang Juncheng, a Shanghai-based analyst at Fitch Ratings, said a wave of defaults like the one in 2022 could happen again this year, as companies with the biggest liquidity problems have already defaulted. said it was low.

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“There’s survivorship bias,” he says. “Those who are destined to default have defaulted, and everyone who remains in the market is surviving.”

However, companies without state support face a lack of funding, Zhang said. “Financing support from financial institutions is highly selective, so financing is proving to be a major challenge for private developers.”

This has left Chinese developers scrambling to secure credit support from the government.

Consider the case of China Vanke, the second largest development company by revenue. The company announced that it has arranged funding to repay debt maturing in 2024, thanks to a pledge of support from the Shenzhen State Asset Regulatory Authority.

Vice Chairman Yu Liang said at a meeting with more than 150 financial institutions and investors last year that with this support, the company will “overcome the difficulties” despite the challenges it faces.

The most significant of these challenges will be regaining the trust of prospective homebuyers. About 80% of homes purchased in China are sold before they are built, meaning buyers must trust that developers will remain solvent long enough to deliver the homes.

And buyers are now well aware that state-owned enterprises have healthier balance sheets. In the first 11 months of 2023, more than 60 real estate companies saw their home sales decline year-on-year, with 31 of them down more than 30%. According to data compiled by the China Real Estate Information Corporation, 28 of the 31 companies were non-state owned.

According to data compiled by CGS-CIMB, in 2023 the market share held by state-owned developers exceeded that of other developers for the first time in the history of the Chinese market, albeit by a narrow margin of 51 percent to 49 percent. .

Over the past decade, developers without state ownership held 70% of the market, but that share is expected to fall below 37% by 2030, analysts said.

“This is a conservative estimate, and the reality may be even worse than we expected,” said CGS-CIMB’s Chen.

Defaulted and distressed developers are rushing to sell assets to generate income and pay their bills, rather than buy land and build new projects.

For example, a month ago, land owned by Logan Group in Shenzhen failed to find a buyer in a forced auction despite a 24 percent discount.

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“Most developers, especially private developers, will probably want to offload the units they own before building new units,” said Natixis’ Ng.

Analysts say this means the gap between state-run developers and other developers will widen over the next five to 10 years.

According to national data, investment in real estate development has been declining since April 2022, and the decline accelerated last year, dropping 9.6% year-on-year to 11.9 trillion yuan.

“It’s simple math,” Chen says. “For state-owned enterprises” [state-owned enterprises] Companies such as Poly and COLI can use 40 yuan for every 100 yuan of sales revenue to purchase land and build premium land banks. Not much has changed compared to before. But how much are privately owned players likely to pay? Almost nothing. ”

According to a report published by research firm China Index Academy, state-owned developers accounted for 49% of the land purchased in the mainland’s 22 orbital cities in 2023 in terms of value, compared to 12% in 2022. increased. Developers with state support, including local governments, account for about 30 percent, and developers without state ownership make up just over 20 percent.

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“This trend is irreversible. State-owned development companies will dominate the market,” Chen said. “Only state-owned enterprises and some high-quality private developers may remain. Others may disappear too.”

Natixis’ Ng said the real estate business as a whole was destined to become a “more state-driven sector” in the long term.

“The importance of the country in the real estate sector is increasing,” he said. “It’s probably going to be a sector that looks more and more like a utility.

“The question with that is whether the government will always do better than the market in matching supply and demand. One of the risks could be oversupply or undersupply.”