Aerial photography of a "riverview house" at the Yangtze River. Yichang, Hubei Province, Oct. 16, 2020. Barcroft Media
China's property market is in serious decline. More developers are facing default threats, and Evergrande's fate remains uncertain. Sinic Holdings, a Chinese real estate developer, will be the center of attention. It warned last week that it was unlikely to repay $250 million in offshore bonds due Monday. As of noon, there was no response from the developer. CNBC reached out to the company. China Properties Group, another developer, announced that it had defaulted in $226 million of its notes due to the failure to obtain funds by Oct. 15. These were not the first Fantasia Holdings to fail to make a $206 million bond payment in October. Rating agencies downgraded Chinese real estate companies last week. If Evergrande fails to pay interest on a U.S. dollar denominated offshore bond, it will be declared in default. The payment was due in September and has a grace period of 30 days. The company has not paid coupon payments for four bonds due within the last few weeks.
These developments follow China's central bank declaring Friday that Evergrande risks are "controllable" and that most real-estate businesses in the country remain stable. The People's Bank of China stated that property companies that have issued bonds abroad, also known as offshore bonds, should fulfill their debt repayment obligations. Yi Gang, the governor of the central bank, made further comments on Sunday. According to Reuters, he stated that authorities would try to stop Evergrande's problems spreading to other real-estate firms. The news agency reported that he said China's economy was doing well, but that there were risks such as default risk from mismanagement at certain firms. According to Moody's estimates, about 25% of China's GDP is made up by real estate and related industries.
China's property developers have seen rapid growth after years of high debt. Authorities introduced the "three redlines" policy last year to address this issue. This policy sets a limit on the amount of debt a company can have in relation to its cash flows, assets, and capital. After the policy was implemented to curb developers, things got out of control. Evergrande, the world's largest developer, warned twice last month that it might default. Since then, it has missed three interest payments on its U.S. dollar bonds. Since Oct. 4, the stock has been suspended and other real estate companies have had their ratings downgraded due to concerns about cash flows. According to MarketAxess data, trading in Chinese real estate bonds jumped to $1 billion in October from $600 million in August. According to MarketAxes, Evergrande's 8.75% bond due in 2025 is the second most traded emerging market bond.
More ratings downgrades
Last week, another round of downgrades was made at Chinese real estate companies. CNBC reached out to each firm for comment, but has not heard back. 1. China Aoyuan
S&P Global Ratings downgraded China Aoyuan on Friday night. This is China's largest developer in China's Guangdong Province, which focuses on China's Greater Bay Area. The agency pointed out the company's high debt and predicted that the firm would slow down its efforts to reduce it over the next year. The agency also highlighted Aoyuan’s "considerable" bond maturities due 2022, which will further put pressure on the property company.
We can be certain that the property sector will struggle. Julian Evans-Pritchard senior China economist, Capital Economics
"The company's decreased visibility on revenue growth and continual margin pressure will hamper deleveraging efforts." Aoyuan's liquidity will be affected by its weakening cash generation. It faces large maturities in 2022. However, we expect that the company can still manage the repayment under tighter circumstances," S&P stated. 2. Modern Land
Fitch also downgraded Modern Land Friday. This was due to Modern Land's decision to delay three months the repayment of a $250 million offshore bond. 3. Greenland Holding
S&P downgraded Greenland Holding on Thursday, just before Friday's downgrades. This is a major real estate developer that owns prestigious properties in New York, London, and Sydney. It also mentioned its "impaired funding access", which will limit the firm's ability to weather the current downturn in property. Fitch stated that it expected the firm's ability generate cash to slow down. Fitch wrote that Greenland's bond values have declined sharply due to investor concerns about the sector. "A prolonged decline in bond prices could affect the confidence of the company’s borrowers, suppliers, or purchasers."
China property'struggling' according to Capital Economics
