After Evergrande, Three More Chinese Real Estate Developers Come Close To Defaulting

After Evergrande, which narrowly missed the default deadline a few days ago, three other real estate groups in China namely Fantasia, Sinic, and most recently Modern Land have missed their interest payments on the issued dollar bonds.

In a statement, Modern Land stated that principal and interest payments on a bond worth $250 million were not met on Monday (25 October), the due date of the payments. Already, the company had requested for a three-month extension to the maturity of the bonds but later withdrew it, stating that the temporary liquidity issues had been resolved, as per a report in the Financial Times.

Like Evergrande, Modern Land too blamed the volatility in the macroeconomic environment arising due to the Covid-19 pandemic for the liquidity crisis. Across China, property sales have fallen since the beginning of the pandemic last year. Along with the pandemic-induced slowdown, Beijing’s regulatory spree has hit the real estate market in China which makes for more than a quarter of the GDP growth.

Many industries, especially pertaining to construction activities, have relied on the strong boom in the real estate market since the late 1990s for growth, thus resulting in them feeling the heat as the defaults begin to kick in. In 2019, it was estimated that China’s real estate sector alone contributed 7 per cent to China’s GDP with related sectors including home furnishings and installations making up for another 10 per cent. Some estimates, however, put it beyond 25 per cent.

From an investment perspective, a thriving real estate sector is critical for China. Against Americans, who invest only one-third of their savings into property, Chinese invest over three-quarters of their savings in real estate, given there are not many options when it comes to overseas investments for Chinese nationals. Thus, defaulting real estate groups pose a threat to all these investments, starting with Evergrande which is yet to finish homes for more than 1.6 million buyers.

For Beijing, rescuing the real estate market will be critical. Of the biggest 25 real estate groups in the world, 10 happen to be in China with Evergrande being the biggest. While it has more than $300 billion in liabilities, Beijing would be looking at its assets, estimated at around $280 billion to pay off the principal and interest payments on its bonds and also complete the pending projects.

As per a report from Bloomberg, Chinese officials have ordered Hui Ka Yan, the billionaire behind Evergrande, to use his personal wealth to ensure that the company meets his commitments to bondholders and also to the buyers.

As per the report, the directive came after 23 September, when the company missed its interest payments, thus kicking in the one-month grace period. Evergrande, eventually, made the $83.5 million interest payment two days before the expiration of the grace period.

While it is not clear if Hui Ka Yan has enough personal assets, valued anywhere between $7 billion to $42 billion to clear off more than $300 billion worth of debts of Evergrande, the move will be seen in continuity with China’s crackdown spree that began this year with Jack Ma’s Ant Group.

However, at some point, Beijing is expected to step in to aid the rescue through nationalisation of Evergrande’s assets or by selling off the company’s land and other physical infrastructure.

China’s banking regulator continues to maintain its confidence in the real estate market and has already ordered banks to increase mortgage lending even as more developers are expected to default. In a separate statement earlier this month, the central bank of China indicated that they were confident of containing the fallout if Evergrande went down.

Also Read: China Responsible For Market Crashes In Three Out Of The Last Five Years