The latest bad news for Evergrande comes from southern China: the government in Danzhou, on the tropical island of Hainan, has forced the world’s most indebted developer to destroy a complex of 39 illegally constructed buildings on a small island. The buildings were, however, almost finished. The group did not need that: it is already mobilizing all its energy and available funds to try to deliver its projects under construction to clients who have often paid their entire amount well in advance.
But all parties affected by the Evergrande crisis are seeking to recover funds, including local governments, which can seize the land from the developer, his main asset. Land sales accounted for around a third of municipal resources until 2020. Evergrande is one of the country’s largest land owners, with 778 projects in 233 cities.
After months of difficulties, the group finally defaulted on a debt due on December 6, 2021, officially entering a restructuring process. But Evergrande, whose debt is estimated at 260 billion euros, is not the only Chinese promoter in difficulty. These last two months, Kaisa, Sunac, Shimao, Aoyuan, joining a dozen small promoters already bankrupt in 2021. In 2021, the sales of the 100 main Chinese promoters fell by 3.5%, the first drop since 2016.
A trend that is accelerating: in December, sales fell by 35%. For the year 2022, Swiss bank UBS forecasts a further decline of 10%. The start of the year promises to be particularly difficult, said Will Chu, real estate analyst at CSG-CIMB Securities in Hong Kong: “A significant amount of their dollar debt matures in January and July. Investors should be on their guard: some private developers will not be able to pay or refinance their debt, ask for delays or lower repayments. “
“Three red lines” to respect
This crisis underlines the difficulty for the authorities to regulate the market without bursting the real estate bubble. For fifteen years, prices have increased six-fold, to the point that the sector indirectly provides 30% of Chinese growth, taking into account sales of materials such as cement and steel.
But faced with a new surge in prices and debt the day following the post-Covid recovery plan, the Chinese authorities reacted by putting in place mid-2020 ” three red lines » accountants to be observed for promoters. At the start of 2021, those who did not respect these rules saw their access to credit severely restricted. « A promoter told us he had 50 billion yuan [6,9 milliards d’euros] at the bank at the end of June [2021], but that he might only touch a third. The rest is frozen by the banks, because they are amounts from payment in advance for apartments not yet delivered », says Will Chu.
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