Even the most “firm” real estate tycoons are changing their perception of the Chinese real estate market. At the interim results meeting on August 31, Sun Hongbin, chairman of Sunac, said, “If you don’t live there, there is no need to buy a house; buy stocks instead! But Sunac will give priority to cities with lower housing prices, and will be very cautious in the investment”. The market sees Sun Hongbin’s words having two meanings. Under the policy of “stay, not speculate”, real estate speculators have no way to go; buying a house is also for living and moderate investment an there is no need to buy a house if one does not stay there; the time of making money by expecting house prices would increase is over. Sun Hongbin also said that the regulation of the property market will not be relaxed, instead it will become more severe, and people's expectations are also changing. Although the withdrawal of Li Ka-shing and the transformation of Wanda have shown signs of cooling down in the real estate industry, the words of Sun Hongbin, who is taking over Wanda’s role, reflect the negative impact of the Chinese real estate market in the context of constant tightening of real estate regulation; the future will be a long, downhill road.
Behind the decline in the Chinese real estate market, the debt risk of real estate developers has risen. In terms of debt ratio, among the Mainland Chinese real estate enterprises that have disclosed semi-annual reports, there are 13 enterprises with total assets of more than RMB 100 billion, with an average net debt ratio of 72.64%, an increase of 8% over the same period of the previous year. In the first half of this year, the proportion of borrowings due within one year of real estate companies in total borrowings also showed an increasing trend. The top five companies with the latest total assets are Country Garden, Vanke A, Poly Real Estate, China Resources Land and Longfor Properties. Apart from Longfor Properties, the debt ratio of the other four real estate companies in the first half of this year has increased compared with the same period last year. From the increase in the debt ratio of leading housing companies this year, Country Garden ranked the first. In the first half of the year, Country Garden’s debt ratio was 68.44%, which was 20% higher than the same period last year. Vanke's growth rate followed closely, and the debt ratio rose from 24.5% last year to 37.41% this year. In the proportion of short-term liabilities due within one year to total borrowings, Country Garden and Vanke A also ranked among the top two leading enterprises, 36.78% and 26.87% respectively.
The proportion of credit facilities of real estate enterprises in the country's major financial institutions has also increased. The balance of real estate loans in the first half of this year was RMB 35.8 trillion, a year-on-year increase of 20.4%, higher than the growth rate of all credit balances of financial institutions of 12.7%. The balance of real estate loans accounted for 27.7% of the total loan balance of financial institutions of RMB 129.2. At the same time, the real estate non-performing loan ratio is rebounding, which is particularly vigilant in the context of the bank's general non-performing loans. For example, in the first half of the year, the non-performing loan balance and non-performing loan ratio of the Agricultural Bank of China achieved double decline, and the personal housing loan non-performing rate also declined. However, the non-performing loan amount of the real estate industry increased from RMB 5.789 billion at the end of last year to RMB 8.539 billion in the first half of 2018. The non-performing loan ratio increased from 1.13% to 1.45%.
With the continuous tightening of regulation, the liquidity risk faced by real estate developers has increased significantly. On the one hand there is the increase in corporate debt ratio and the growth of short-term debt; on the other hand the financing is blocked and the property market is strictly regulated. For real estate developers, market risks such as weaker market sales and lower sales scales are not the biggest problems; the most worrying issue is the capital chain of housing enterprises. Most Chinese real estate developers are highly indebted, especially for the larger real estate developers that rely on the volume and rapid turnover of funds, the capital chain is the lifeline. Now that the macroeconomic situation is gloomy and the financing situation has deteriorated, under the strictest control of the bank mortgage policy in history, local bank mortgages have contracted significantly. The scale and proportion of personal housing loans have declined in the first half of the year, while the development loans of housing enterprises have declined. More obviously, taking a leading real estate enterprise as an example, the real estate stalls in the mainland and overseas has over-expanded. This year, there have been a lot of incidents; a certain large-scale project in Southeast Asia has been restricted and many Chinese projects have seen incidents regarding to safety, which has seriously affected the company's return of funds. Anbound points out that 1,700 houses in a certain Taiyuan project have been pre-sold, but the construction of the project has not even started yet. Can the developer hand over the houses on time after one year? Will it cause default and other problems? This is worth to be taken note of. The problem behind such incidents is that the capital chain of the housing enterprises tends to be tense. Similar examples can be seen in other large real estate developers in varying degrees. The market is declining, policies are becoming stricter, and financing is tightening. These changes are all leading to the tightening capital chain of high-debt real estate developers and more pressures in debts.
The huge financial leverage and capital turnover pressure faced by housing companies are like a time bomb that affects the financial security and economic stability. As a financial attribute of the capital-intensive real estate industry, the balance of real estate loans accounted for 27.7% of the total loan balance of financial institutions across the country. Large real estate developers bear huge debts, of which Country Garden’s total liabilities have reached RMB 1.2 trillion. The scale of Vanke’s debt have reached RMB 1.1 trillion, and the total liabilities of Poly Real Estate have also reached RMB 650 billion, all of which reached the scale of medium-sized financial institutions, which made them “too big to fail”; they involved many banks and related to too many individual buyers. If other financing methods are included, the total debt of the real estate industry should be at least RMB 45 trillion, which exceeds the 50% of China's total GDP (about 55%). It can be argued that every high-debt real estate company in China now has a "bomb" of financial risk on its head. Once the bomb explodes, it will trigger huge financial risk.
Final Analysis Conclusion:
From the macro perspective, the de-leveraging and industrial restructuring require the Chinese economy to get rid of being hijacked by the real estate industry. However, due to the huge scale of real estate and real estate finance, the regulation of the market has to be considered; there can only be slow dismantlement and gradually release of the risks. In this process, it is not possible to rule out the situation of sudden changes, and there is a possibility that one or two large real estate developers will break the capital chain, which may trigger financial risks.
