China’s real estate sector, once a booming industry and a key driver of the country's economic growth, has been in a state of crisis since a government-led campaign to trim debt and curb speculative investment. The sector’s cash crunch was once again under the spotlight when leading developer Country Garden sought to delay bond payments in early August. It has 108.7 billion yuan of debt due in the next 12 months.
The seeds of the crisis were sown in 2020 when regulators tightened policy in the sector by imposing caps on three key debt ratios, making it more difficult for developers to secure credit. As a result, companies including Evergrande found themselves locked out of credit markets and they started defaulting.
Country Garden’s risk of default rings alarm bells because of its size; It was the sector’s largest company by attributable sales, 356.9 billion yuan in 2022. It has 3,121 projects at different development stages across Mainland China, both commercial and residential.
The graphic is a bubble chart depicting China’s top 25 real estate companies by attributable sales in 2022 with Country Garden topping the list.
The physical size of Country Garden’s real estate portfolio is enormous. As of the end of 2022, a total of 127.8 million sq. meters of gross floor area was under development, of which more than 60% was already sold.
A Sector Under Pressure
The distress in China’s real estate sector gathered steam in late 2021, when giant developer Evergrande first defaulted. The company reported a loss of 476 billion yuan in 2021 after recording a profit every year prior. Its losses have narrowed since, but the company remains in the red. Evergrande reported a loss of 33 billion yuan for the first six months of 2023.
The graphic is a bar chart showing the annual profit/loss of four companies: Country Garden, Evergrande, CIFI Holdings and Sunac China from 2015 to 2022 and the first six months of 2023. Evergrande, CIFI Holdings and Sunac China have been coloured differently since they have defaulted.
Sunac China and CIFI Holdings, which first defaulted last year, have reported significant losses in 2022 as well. Though Country Garden has so far dodged default, it reported a loss of over 6 billion yuan in 2022 and its losses deepened further in the first six months of this year.
The Weight of Debt
The ballooning debt crisis could delay the prospect of a recovery of both the property market and the broader Chinese economy, in which real estate is a core pillar.
Country Garden, once considered to be financially sound and stable, failed to pay the interest on two of its bonds due in August and narrowly avoided default by making the interest payment hours before a 30-day grace period ended on September 5.
It also failed to pay an interest of $15 million on a bond that was due in September but was granted a 30-day grace period.
The graphic is a scatter plot showing liabilities on the horizontal axis and profit/loss plotted on the vertical axis of the top 25 real estate companies by sales in 2022. Each circle is sized according to their sales.
Country Garden’s liabilities of 1.54 trillion yuan were the highest among the top-25 real-estate companies in China, and it was among seven to have reported a loss.
A Crisis of Confidence
Home sales, property investment and new construction have been contracting for more than a year and as developers began struggling to finish pre-sold housing projects, homebuyers protested, threatening to stop mortgage repayments.
The slump in the overall economy has made consumers increasingly cautious, choosing saving over spending and scaring away prospective home buyers.
China property sector slump
China’s property sales, investment and funds raised by property developers slid in January - August 2023 after a sharp fall in 2022.
The graphic has three bar charts showing property sales by floor area, investment in real estate and funds raised by real estate developers between 1999 and 2022 and first eight months of 2023.
Property sales by floor area in China fell by 7.1% between January and August of 2023 compared to the first eight months of last year. Investment completed by the real estate sector declined by 8.8% year-on-year, the second lowest since 1999. Funds raised by developers in the January-August period of this year fell by nearly 13%.
Potential implications
While Chinese developers Sunac and Country Garden have forged debt deals with creditors, the outlook for a recovery in home sales remains uncertain. China's property sector accounts for more than half of global new home sales and home building, according to Nomura. The implications of a prolonged slump are not just limited to the sector alone but other stakeholders – both domestic and global.
For local government
Local governments are sitting on more than $9 trillion of debt, according to the International Monetary Fund, as their main source of revenue – land auctions to developers – fell off a cliff. The property sector’s contribution to the local governments’ revenue dropped from 38% in 2020 to 30.8% in 2022, according to Nomura.
Signaling more pressure ahead, in August China’s government land sales revenue fell 22.2% from a year earlier, the 20th consecutive monthly decline, according to data from the finance ministry.
For investors
Moody's recently cut China's property sector's outlook to negative from stable, citing weak economic growth prospects and homebuyers’ concerns over project completion and delivery impacting sales.
A recent survey of Chinese and international investors carried out by JPMorgan, showed that 55% of participants believed that the market was “still at the trough” of its crisis, indicating that the worst is not over for the Chinese property sector.
For existing home buyers
With homebuyers on the edge, pressure is on developers and the government to ensure delivery and regulators have had to scramble to pledge more support.
In China, 90% of new houses are purchased while still under construction. In June of 2022, when the liquidity crunch forced developers to slow the pace of building, homebuyers in at least 100 cities threatened to halt mortgage payments. Tensions remain high.
For the global economy
China’s real estate sector accounted for about 29% of its GDP, according to a working paper by the National Bureau of Economic Research. Any contraction in the property sector will affect China’s growth, thus sending ripple effects around the globe as the world’s factory slows.
Sources
China Real Estate Information Corp.; National Bureau of Statistics of China; LSEG Eikon; LSEG Datastream; S&P Ratings; Nomura; National Bureau of Economic Research; company financial reports; The Noun Project; Burj Khalifa image by REUTERS/Abdelhadi Ramahi
Additional reporting by
Xie Yu, Clare Jim and Han Huang
Additional development by
Jackie Gu
Edited by
Sarah Slobin, Sumeet Chatterjee and Lincoln E. Feast