Beijing’s Squeeze On Fragile Real-Estate Developers
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Beijing’s Squeeze On Fragile Real-Estate Developers

Broad bank lending to the real-estate sector, and developers is being squeezed.

By Mike Bird
Fri, Apr 30, 2021 2:16pmGrey Clock 2 min

“Housing is for living, not for speculation,” has been a Chinese government mantra for almost half a decade. This year, it appears that slogan finally has teeth. But new restrictions on bank lending leave developers tapping a unique source of funding, which could have damaging consequences of its own.

Late last year, Chinese regulators announced that property lending should make up no more than 40% of banks’ total lending, effectively putting an end to years of steadily increasing exposure to real estate.

Looking across major Chinese banks’ results for 2020, they are very much at that limit in aggregate. At the big four—Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China—real-estate lending ran to between 37.5% and 42.2% of total loans, according to Capital IQ.

That adds to the squeeze on bond issuance from Beijing’s “three red lines” policy, which restricts further borrowing if developers don’t satisfy three leverage benchmarks. Most don’t, and issuance has eased to the smallest amount in three years in early 2021—down by a third relative to the same period in 2019—according to S&P Global Ratings.

That means a further shift to the last meaningful source of funding left, deposits direct from home buyers, is inevitable.

Deposits often constitute a large proportion of the property’s value and are now largely paid upfront, 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 commitments.

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 which remain unfinished. That is equivalent to more than 18 months of completions at last year’s building rate. Vanke’s unearned revenue figure—payments accepted for work not finished—sits at $104.15 billion, more than three times its level at the end of 2015, and jumped by around $7.8 billion in the first three months of 2021 alone.

That accelerated shift is also clear from official industrywide data. Deposits are now the largest single source of real-estate developer funding, and in the 12 months to March, deposits and advance payments rose 23.9%, far outstripping the 14.1% growth in other funding sources.

That makes domestic news reports about a growing number of frustrated buyers worried about repeated delays to construction, like one carried by Xinhua News Agency earlier this month, particularly interesting and concerning.

Chinese home buyers aren’t sophisticated creditors like bondholders or banks, but they carry unparalleled political weight. Leaving them to foot the bill for the excesses of fragile real-estate developers is a risky decision.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: April 29, 2021.



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London’s Luxury Property Market Turns a Corner

After more than a year, prices have finally levelled out in prime central London, while outer London saw a small uptick in high-end prices from the previous quarter

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The first quarter of the year brought some long-awaited signs of recovery in London’s luxury housing market, offering the first positive quarterly price growth since September 2022, according to a report from Savills on Wednesday.

After six consecutive quarterly price falls, luxury home prices in central London levelled out in the first three months of the year, with a 0.1% quarterly uptick in prices. The £3 million to £5 million (US$3.79 million to US$6.32 million) market saw a slightly larger increase of 0.3%.

Outer London’s luxury market saw greater quarterly price growth, with home prices up 0.8%, as some stability returned to mortgage costs and lured more buyers back to the market, according to the report.

All of this is evidence that the market is “in early stages of recovery,” according to Lucian Cook, head of residential research at Savills.

“The outlook for the housing market has certainly improved, partly because the mortgage market has recovered more quickly than expected,” Cook said in the report. “With the first rate cut rapidly coming into view and recessionary risks easing, greater stability has returned to the cost of mortgage debt, which has positively impacted domestic prime markets, where many buyers rely on borrowing, most notably in leafy outer prime South and West London, as well as the commuter belt.”

Outside of London, prices across the U.K. saw no quarterly growth heading into the beginning of the spring market, which is expected to bring higher levels of buyer activity in many regions.

Suburban regions saw prices dip just 0.1%, while urban areas—like Edinburgh and Glasgow in Scotland, and Bath and Oxford in England—saw prices increase by 0.6%.

Cook said regional buyers are more likely to be concerned about market uncertainty than London buyers in the lead up to the general election.

“As a result, buyers are still expected to be less committed until the dust has settled,” he said.

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This stylish family home combines a classic palette and finishes with a flexible floorplan

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