The crisis in China’s real estate market is becoming worse as potential purchasers put off making purchases, which has a negative impact on sales and raised worries about the sustainability of the sector. According to Edward Chan, a director at S&P Global Ratings, the top 100 developers’ new house sales fell sharply in June and July compared to the same two months last year. After seeing double-digit growth earlier in the year, this sales decrease prompts urgent requests for government involvement to save the beleaguered industry.
Recent events, such as the impending default of Country Garden, China’s biggest non-state-owned developer by sales, have made the urgent situation even worse. The corporation has fewer than 30 days to pay $22.5 million in coupon payments on two dollar bond installments that it missed on August 7. The world’s most indebted real estate developer, Evergrande, has recently requested bankruptcy protection, which further eroded investor trust.
Up to a quarter of economic activity in China is attributed to the real estate industry, which has a substantial influence on the economy of the nation. As seen by the growing market worries about contagion and defaults, the sector’s problems are adding to the strain on the second-largest economy in the world. JPMorgan has updated its projection for corporate high-yield defaults in developing countries worldwide, attributing the rise in default worries to possible repercussions from Country Garden’s predicament.
Country Garden is having problems as a result of its extensive exposure to China’s smaller cities, where there is a shortage of homes. These less developed locations host around 61% of the company’s projects. Country Garden’s sales performance has been appalling, according to Edward Chan of S&P Global Ratings, with sales in June and July falling by around 50% compared to the same months last year. May saw the beginning of sales downturn in lower-tier cities, while future months saw sales declines in higher-tier cities.
The “three red lines” policy of the Chinese government, which was implemented in 2020, has made borrowing more difficult for developers, adding to the sector’s difficulties. According to this strategy, debt should not exceed a company’s cash flow, assets, and capital levels. In this sense, Evergrande’s default in 2021 was a momentous occurrence.
Uncertainty in the housing industry is increasing as China’s authorities work to stabilize the real estate market due to worries about government assistance and the financial problems prominent firms like Country Garden are experiencing. State-owned developers seem to be in a stronger situation than non-state ones, as shown by the fact that during the first seven months of the year, contractual sales for state-owned developers increased by 48% while sales for non-state developers fell by 19%.
Despite the difficulties, the unmet housing demand in first-tier cities is still reasonably substantial. Experts believe that clarity in policy is essential for stabilizing demand and sales in higher-tier cities. It may take some time for the impacts of such stability to reach lower-tier cities, but they may eventually do so.
To sum up, China’s real estate industry is struggling with decreased sales, worries about defaults, and a lack of certainty over government assistance. The sector’s difficulties are affecting not just economic activity but also the housing market more broadly. The direction that China’s real estate market will go in the future is still unknown as players wait for new legislative changes.
