Aerial photograph of the “River View House” on the Yangtze River. Yichang, Hubei province, October 16, 2020.

Cost | Barcroft Media | Getty Images

The fallout in China’s real estate sector shows no signs of slowing down, as more developers face the threat of default, even as uncertainty over the fate of heavily-indebted Evergrande looms .

All eyes will be on Chinese property developer Sinic Holdings, who warned last week that it would likely not repay the $ 250 million offshore bonds owed on Monday. There was still no word from the developer at noon. CNBC has contacted the company.

Another developer, China Properties Group, said on Friday that it defaulted on notes worth $ 226 million because it failed to secure funds by the due date of the 15th. October.

They weren’t the first – Fantasia Holdings had not made a bond installment worth $ 206 million in early October.

Last week, rating agencies released another round of downgrades for Chinese real estate companies.

This week, Evergrande will officially default if it does not pay interest on an offshore bond denominated in US dollars – payment was due in late September but has a 30-day grace period. The company has been silent on coupon payments on four other bonds that were due in recent weeks.

The developments come as China’s central bank said on Friday that the risks posed by Evergrande are “controllable” and most of the country’s real estate companies are stable.

However, the People’s Bank of China has also said that real estate companies that have issued bonds abroad – called offshore bonds – should actively meet their debt repayment obligations.

Central bank governor Yi Gang made additional comments on Sunday. He said authorities would try to prevent Evergrande’s problems from spreading to other real estate companies, according to Reuters.

He also said that the Chinese economy “is doing well,” but facing challenges such as default risks due to “mismanagement” in some companies, the news agency reported.

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Chinese real estate developers have grown rapidly after years of excessive debt, prompting authorities to roll out the “three red lines” policy last year. This policy places a limit on indebtedness based on a company’s cash flow, assets and capital levels.

Things came to a head after politics started to hold back developers. The world’s most indebted developer Evergrande has twice warned last month that it could default.

He has since missed three interest payments on his US dollar bonds. The action has been on hold since Oct. 4, and rating agencies have downgraded other real estate companies over concerns about their cash flow.

Chinese real estate bond trading has reached over $ 1 billion so far in October, from over $ 600 million in August, according to data from the electronic fixed-income trading platform MarketAxess. . Evergrande’s 8.75% bond maturing in 2025 is currently the second most traded emerging market bond on his platform, he said.

No more downgrades

There was a new round of downgrades at other Chinese real estate companies last week.

CNBC has sought comments from each of the companies but has yet to receive a response.

1. China Aoyuan
On Friday evening, S&P Global Ratings downgraded China Aoyuan, one of the biggest developers in the Chinese province of Guangdong, which focuses on the Great Bay region of the country. The rating agency highlighted its high leverage and said the company’s decision to reduce its debt will slow down over the next year.

He also pointed to the “sizeable” maturities of Aoyuan’s bonds due in 2022, which will put additional pressure on the real estate company.

One thing we can be sure of is that the real estate industry is in trouble.

Julian Evans Pritchard

senior economist in China, Capital Economics

“The company’s reduced visibility to revenue growth and continued pressure on margins will hamper debt relief efforts. Weaker cash generation will also put pressure on Aoyuan’s liquidity as it faces large deadlines in 2022, despite our expectation that the company can still settle the repayment in a tighter situation, “he said. declared S&P.

2. Modern earth
Fitch also demoted Modern Land on Friday, citing the developer’s decision to delay the repayment of a $ 250 million offshore bond for three months.

3. Holding Greenland
Ahead of Friday’s downgrades, S&P on Thursday downgraded Greenland Holding, one of the largest real estate developers with prestigious properties in cities like New York, London and Sydney. He also cited his access to “impaired” financing, which will limit his ability to weather the downturn in the real estate sector. Fitch said he expects the company’s ability to generate cash to slow.

“Greenland bond prices have again deteriorated sharply following broader investor concerns about the sector,” Fitch wrote. “Prolonged weakness in bond prices could undermine the confidence of borrowers, suppliers and buyers in the company.”

Chinese properties “in difficulty”: Capital Economics

New home sales have plunged in recent weeks and are now 25% below 2019 levels, research firm Capital Economics said in a note on Friday.

“The Evergrande debacle has likely given homebuyers concerns about whether developers will honor their pre-sale commitments,” said Julian Evans-Pritchard, senior economist for China at Capital Economics.

Meanwhile, developers’ land purchases have collapsed as they “close the hatches” to overcome slowing sales and funding constraints, the economist added. This suggests a further decline in new housing projects in the coming months.

“One thing we can be sure of is that the real estate industry is in trouble,” he wrote.

Looking ahead, he expects further easing of housing sector policy as authorities seek to stimulate housing demand. This can include lowering minimum down payment requirements for first-time homebuyers and lowering rates to lower mortgage costs, Evans-Pritchard wrote.

“We don’t expect policymakers to ease constraints on developer funding or allow a sharp acceleration in overall credit growth,” he said. “Leadership, in our view, remains committed to reducing developer leverage. “


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