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InvestmentsAnalysis-Evergrande woes to take toll on China property sale and drive M&A...

Analysis-Evergrande woes to take toll on China property sale and drive M&A By Reuters


© Reuters. The Evergrande Center of China Evergrande Group is seen in Shanghai, China September 24, 2021. REUTERS/Aly Song

By Clare Jim

HONG KONG (Reuters) – The debt disaster engulfing China Evergrande Group has begun to dent homebuyer sentiment and pressure builders to reduce costs, signalling deeper penalties for the world’s No.2 financial system and a consolidation within the overcrowded property sector.

Evergrande, which epitomises the borrow-to-build enterprise mannequin, is suffocating underneath $305 billion of debt and has stopped repaying some traders and suppliers and halted constructing work at many initiatives throughout the nation.

What has quickly grow to be China’s largest company headache has now smashed client confidence in property funding, as cash-strapped Evergrande struggles to full dwelling developments for consumers.

While contagion fears from a potential Evergrande collapse have depressed international monetary markets, analysts say the property sector, which accounts for 1 / 4 of the nation’s gross home product, could possibly be the worst hit.

“It’s not China’s Lehman moment that we should be worried about. It’s a sharp drop in property sales,” Capital Economics chief Asia economist Mark Williams mentioned, referring to the 2008 collapse of U.S. funding financial institution Lehman Brothers.

On Friday, Evergrande inched nearer to the potential default that traders concern, lacking a cost deadline in one of many clearest indications but that the developer, whose debt struggles have spooked markets, is in dire bother.

The developer is now repaying some suppliers, in addition to retail traders in its opaque wealth administration merchandise, partly in accomplished actual property in an effort to ease social tensions.

“It’s not the first time a developer has used real estate as payment to suppliers,” mentioned realtor Centaline Shenzhen common supervisor Alan Cheng. “But it’s the first time homebuyers realize a big developer like Evergrande can collapse too – they think there must be something wrong with this market.”

He mentioned purchaser sentiment had turned pessimistic, leading to low transaction volumes and confirming a market downtrend.

Adding strain to dwelling costs, Cheng mentioned different builders, together with Kaisa and state-backed China Resources Land, reduce promoting costs within the southern metropolis of Shenzhen, after a 30% low cost promotion by Evergrande in May.

Kaisa mentioned it didn’t have a remark on worth cuts, whereas China Resources Land didn’t reply to request for remark.

Growth in China’s property gross sales by ground space within the first eight months slowed to 15.9% from a 12 months earlier, in contrast to 21.5% progress within the first seven months, because the sector was onerous hit by a liquidity squeeze. Growth was 105% year-on-year within the first two months of 2021, rising from a low base in 2020 when gross sales have been damage by the COVID-19 pandemic.

CONSOLIDATION DRIVE

Nomura mentioned the decline in new dwelling gross sales accelerated within the first two weeks of September from August to 16%, and 49.5% from a 12 months earlier for prime and decrease tier cities, whereas they eased to 15.5% for tier-2 cities.

Capital Economics’ senior China economist, Julian Evans-Pritchard, mentioned Evergrande’s disaster had had a a lot greater influence on housing demand than he had anticipated, and households had turned rather more cautious, triggering a drop in costs.

He mentioned that whereas most builders would have the opportunity to address weaker gross sales for six months, a broader shift in property gross sales triggered by the detrimental sentiment can be extra worrying.

To face up to the disaster, the sector was anticipated to see a wave of consolidation within the near-term, some analysts mentioned.

China’s property market has been extraordinarily fragmented, with an estimated greater than 50,000 builders on the peak. Given many have been small and poor high quality, Beijing additionally desires to drive consolidation, analysts mentioned.

No.3 developer China Vanke and Guangzhou-based KWG Group mentioned of their earnings conferences final month they have been eyeing M&A to purchase land from distressed friends, when costs are sometimes cheaper than at public land auctions.

Vanke mentioned it had been in talks with Evergrande previously few months on mission cooperations, and it has acquired three initiatives of Sichuan Languang Development, a smaller developer that defaulted in July.

Country Garden Services, the property administration unit of developer Country Garden, mentioned on Monday it had agreed to purchase Wealth Best Global, an arm of Guangzhou R&F Properties Co, for 10 billion yuan ($1.55 billion).

“Consolidation will definitely accelerate under the current tight credit environment,” mentioned an govt of a developer based mostly in jap China, including it was taking a look at just a few initiatives now.

“If a company in a liquidity crunch doesn’t sell its assets quickly when the problem first emerges, it may collapse like Evergrande,” mentioned the chief, declining to be named as he was not authorised to converse to the media.

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