Beijing’s pressure on fragile real estate developers becomes real

“Housing is for living, not for speculating,” has been a mantra of the Chinese government for nearly half a decade. This year, it looks like the slogan is finally having some bite. But new restrictions on bank lending let developers tap into a single source of funding, which could have damaging consequences.

Late last year, Chinese regulators announced that home loans should not account for more than 40% of total bank loans, ending years of growing exposure to real estate.

If we look at the results of the big Chinese banks for 2020, they are broadly at this limit overall. In the Big Four — Bank of China, China Construction Bank,

Agricultural Bank of China and Industrial and Commercial Bank of China – Home loans accounted for between 37.5% and 42.2% of total loans, according to Capital IQ.

Residential developments in China, such as those located outside of Shanghai, are often offered for deposit before they are completed.


Photo:

Qilai Shen / Bloomberg News

This is in addition to the squeeze on bond issuance from Beijing’s “three red lines” policy, which restricts additional borrowing if developers fail to meet three leverage criteria. Most don’t, and emissions were reduced to a three-year minimum in early 2021, down a third from the same period in 2019 according to S&P Global Ratings.

This means that a new shift to the last remaining significant source of finance, direct deposits from home buyers, is inevitable.

Deposits often constitute a large part of the property’s value and are now largely prepaid, long before a property is actually built. Without a national escrow system in place, this allows developers to use today’s deposits to fund yesterday’s liabilities.

China Vanke,

one of China’s largest developers, reported 53.52 million square meters (about 576 million square feet) of projects it has sold but remains unfinished. This equates to more than 18 months of completions at the pace of construction last year. Vanke’s unearned revenue figure (payments accepted for unfinished work) stands at $ 104.15 billion, more than three times its level at the end of 2015, and has jumped to about $ 7.8 billion. dollars in the first three months of 2021 alone.

This accelerated change is also clear in official industry data. Deposits are now the largest source of funding for real estate developers, and in the 12 months to March deposits and prepayments rose 23.9%, far outpacing the 14.1% growth from other sources. funding.

This makes national reports of a growing number of frustrated buyers worried about repeated construction delays, such as the one released by the Xinhua News Agency earlier this month, particularly interesting and concerning.

Chinese homebuyers are not sophisticated creditors like bondholders or banks, but they have unprecedented political clout. Letting them pay for the excesses of fragile real estate developers is a risky decision.

Write to Mike Bird at [email protected]

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