China property crisis: if last year was bad for the likes of Evergrande, Kaisa and Fantasia, just wait for 2022 as more pain predicted for investors

• The outlook for China’s developers appears bleak amid looming debt maturities, falling home sales and uncertainty over the proposed property tax
• Home sales are likely to drop between 5 and 10 per cent this year, according to forecasts by analysts, rating companies

Last year has no doubt been difficult for Chinese developers and the pain could get worse in the new year for companies, homebuyers and investors alike. A liquidity crunch amid slowing home sales are likely to dominate sentiment.

China Evergrande, Kaisa Group, Fantasia Holdings and Modern Land (China) all made headlines over their failure to repay onshore and foreign creditors.

Beijing’s “three red lines” policy, which set the debt thresholds for the real estate sector, limited highly leveraged developers’ access to new funds. It was widely cited as the reason for the situation they find themselves in currently.

Stock investors lost more than US$90 billion of market value from their holding in Chinese property stocks in Shenzhen, Shanghai and Hong Kong bourses last year, according to Bloomberg data. The MSCI China Real Estate Index, which tracks 53 developers, sank 36 per cent in 2021, erasing US$126 billion of value.

“We do not expect a meaningful rebound [in their stock prices] until we see proof of significant policy easing, or a major turnaround in contracted sales,” JPMorgan Chase said in a research note recently. “The sector could stay range bound near term.”

Weaker housing market across the country, due to lengthy delays in mortgage approvals, has compounded the crisis. Contracted sales, or money collected from home presales, slumped by one-third last year through December 12, a trend that is likely to persist in the opening months of 2022.

Cracks in China’s US$1.7 trillion housing market, about seven times the size of the US market in 2019, are widening. Sales rose 3 per cent in 2021 and are forecast to drop by 5 to 10 per cent this year, according to estimates from eight research reports from brokerages, money managers and rating companies compiled by the Post.

“It’s not yet [hit] bottom,” said Chen Shen, an analyst from Huatai Securities. “The expectation of a downward trend in home prices has formed. Demand for homes is likely to remain weak and that will keep Chinese developers’ liquidity tight.”

The slide has not been helped by concerns about China’s plan to roll out a property tax across many mainland cities, giving owners sleepless nights, having already experimented with it in Shanghai and Chongqing over the past decade with little success in taming wild prices.

“More home seekers would just wait and see as they expected the home prices to drop or at least not to increase much in the near future,” said Yan Yuejin, research director at E-house China Research and Development Institute in Shanghai. “Thus, contracted home sales are very likely to dip next year. That would continue to pressure developers.”

Contracted sales is the primary cash stream for home builders in China, and presale accounts for nearly 90 per cent of new home sales and more than half of developers’ funding, according to Nomura Holdings, Japan’s biggest brokerage.

“Until there is a big improvement [in sales], the market is likely to remain worried about developers’ liquidity risks,” JPMorgan said in its note.

Such a fundamental recovery, however, may not be seen any time soon.

The central government and provincial level authorities have repeatedly highlighted that “the real estate sector is a pillar industry” and have taken several measures in cities across China since late September to ease the industry’s pain as the slowdown created headwinds to the nation’s economic development.

The government has also reinforced President Xi Jinping’s principle that “houses are for living in, not for speculation” as highlighted again during the annual central economic work conference last month.

An about-turn by Heilongjiang’s housing authority on December 20 provided a peek into the still tough stance on the sector. A statement on the northeastern province’s government website called for “all out efforts” to promote the real estate industry’s growth.

However, after a screenshot of the statement went viral on social media, the statement soon disappeared from the provincial government’s WeChat account and website the next day.

“The government’s narrative on real estate is obviously moving in the direction of easing, but it is unlikely to see a 180-degree change as that would affect the stability of the sector” said Yan.

The market, after experiencing some of the worst sell-offs in Chinese property shares and bonds, will not react positively unless some concrete policy easing steps are taken, he added.

The debt woes of Chinese developers are far from over and more defaults are likely next year as the maturity wall grows, analysts said.

They have US$19.8 billion worth of offshore bonds coming due in the first quarter, almost double the amount in the final three months of 2021. Another US$18.5 billion will mature in the second quarter. Onshore, they face 84 billion yuan (US$13.2 billion) and 91 billion yuan of repayments, respectively.

The cumulative default rate of China’s junk dollar bonds is expected to rise to 42 to 45 per cent in the coming three to six months, from 38 per cent in 2021, said Jack Siu, Credit Suisse’s Greater China chief investment officer.

Goldman Sachs has forecast the default rate in the same segment will reach 28.7 per cent by the end of 2022. Chinese developers are seen accountable to 90 per cent of the junk bond delinquencies in Asia, the US investment bank said.

“More defaults are likely ahead without access to financing for Chinese developers,” said Raymond Cheng, property analyst at CGS-CIMB Securities. “Many of them are not well prepared to repay these debts, given the unexpected shutdown of refinancing channels.”

Author: Pearl Liu, SCMP