China’s Plan to Manage Evergrande: Take It Apart, Slowly
Beijing is working on a controlled implosion of the real-estate giant.
Beijing is working on a controlled implosion of the real-estate giant.
Some investors feared that China Evergrande Group, the world’s most indebted real-estate firm, would collapse spectacularly, triggering losses far and wide. Instead, the Chinese state is dismantling the giant developer slowly and behind the scenes, in what amounts to one of the biggest financial challenges Beijing has faced in years.
The plan, according to people familiar with the matter and official government statements, is to manage a controlled implosion by selling off some Evergrande assets to Chinese companies while limiting damage to home buyers and businesses involved in its projects.
Chinese authorities must do this without bringing down the country’s epic property boom. Evergrande is struggling to manage roughly $300 billion in liabilities, including close to $20 billion in outstanding U.S. dollar bonds.
Looking out for foreign investors isn’t a priority, people familiar with the matter say. Still, Beijing is closely monitoring the situation, because authorities need credit markets to be healthy to prevent other property developers from failing and because they worry about China’s image, one of those people said.
It could take years to take the company apart, and many details are still being worked out, people familiar with the matter say. It’s possible some version of Evergrande could survive, though it would likely be much smaller.
Much of the work so far has focused on Evergrande’s hundreds of stalled projects, a process that will likely involve bringing in other developers to take over.
Under orders from Beijing, most of the 200 or so cities with Evergrande projects have set up task forces to help manage the process, people familiar with the matter say. Local authorities have been ordered to assemble accountants to examine Evergrande’s local finances, talk to other developers about completing unfinished projects, and set up law-enforcement teams to monitor any public discontent.
The State Council’s Information Office and China’s Ministry of Housing and Urban-Rural Development didn’t respond to requests for comment. Evergrande has said it’s working hard to resolve its issues, at times with government involvement.
In a WeChat statement on Oct. 31, Evergrande thanked the government “at all levels” for helping it deliver a residential project to home buyers in Zhejiang province. In the past few months, officers from the local housing and urban-rural development bureau had helped solve problems, the company said.
Evergrande said its engineering department had strictly followed government instructions, without elaborating on what they were.
A central concern for the government is making sure people get the properties they paid for.
While some Chinese citizens have ploughed their savings into new homes, many individuals also bought apartments as investments in recent years, without any intention of living in them or renting them out. Chinese developers often collect money from buyers before completing construction, putting that money at risk if projects get abandoned or suspended.
Evergrande presold more than a million apartments that remain unfinished. If those units aren’t completed, many households could suffer painful losses, undermining confidence in the housing market. The industry accounts for roughly one-fourth of the country’s economic activity and the majority of household wealth.
Local authorities have required Evergrande to transfer revenues from unfinished homes to escrow accounts overseen by the government, according to notices reviewed by The Wall Street Journal and Chinese media.
Local governments are funnelling some of that money to Evergrande’s suppliers so construction can continue, according to people familiar with the matter. Evergrande has had to submit applications to the government-managed accounts for the funds to be disbursed, one of the people said.
“We are gradually receiving payments either from Evergrande or from accounts overseen by the government,” said an investor-relations employee of Shenyang Landscape Co., a landscape design and construction services firm that works with Evergrande. He said work has resumed in some cities, echoing statements from Evergrande, which recently said it has restarted construction at a number of sites.
In some places where projects weren’t as far along, local governments have urged Evergrande to scrap work entirely and return payments to home buyers, people familiar with the matter say. Local authorities are talking to other developers about taking over the land, they said.
In Zhejiang province, a county-level government made Evergrande pay back over 50 million yuan, or around $7.8 million, in full refunds to more than 200 owners of unbuilt homes, according to a government release.
The company is sitting on many completed and unsold homes in different locations. It’s less clear what will happen with those.
While Beijing’s program looks well-organized in some cities, it appears to be moving slowly and haphazardly in others. Many suppliers say they’re still waiting for funds. Changsen Building Materials, a wood supplier in the city of Dongguan, hasn’t been paid by Evergrande and has filed a claim against the developer in a local court, the business’s owner told the Journal. He declined to say how much the company is owed.
Several other building-materials companies said in regulatory filings or published notices that they still have large unpaid bills from Evergrande and are working with the company to take over unfinished apartments as payment in kind.
Suzhou Gold Mantis Construction Decoration Co. is working with Evergrande to resolve millions of dollars in outstanding payments, a representative told the Journal. The company said in a recent regulatory filing that there was “significant uncertainty” in how Evergrande would settle its unpaid bills.
Two other major partners, a supplier of waterproof materials and an architecture and interior-design company, told investors in recent months that they were no longer taking on Evergrande projects.
Guangdong Dongpeng Ceramic Co., a tile maker, said in its third-quarter report on Oct. 30 that the main reason for its decline in profit and revenue growth was because Evergrande couldn’t pay its bills.
Some buyers who recently took ownership of Evergrande apartments found problems such as unfinished interiors and gas and water leaks, according to complaints posted on government websites and social media.
At the same time, China’s central government is working to help Evergrande sell off larger parts of its empire.
In September, China’s financial regulators urged Evergrande to sell a nearly 20% stake in Shengjing Bank Co. to a state-owned enterprise, according to a person familiar with the issue. Evergrande soon struck a deal.
The company has previously said it sold property units to suppliers and contractors to settle billions of dollars in outstanding payments. It raised more than $50 million last month by selling two of its private jets and $145 million this month by unloading some of its shares in an online media company.
Evergrande also managed to sell its stake in a residential project called The Vertex in Hong Kong to a partner shareholder, according to a person with knowledge of the matter. Evergrande employees were instructed to withdraw from the project in recent days after the deal was completed, internal conversations reviewed by the Journal showed.
A $2.6 billion deal for a majority stake in Evergrande’s property-management unit fell apart last month.
Chinese authorities have publicly suggested they won’t bail out Evergrande or inject money into the company, which would undermine their goal of showing that no private firms are too big to fail in China. They’re also working to discourage real-estate speculation.
“The stage where real-estate companies rely on high leverage and quick turnover to achieve high profits no longer exists,” the Economic Daily, a state newspaper, said in an article in September. “Business operators must change their mentality as soon as possible and actively respond to changes in the situation.”
Beijing helped trigger much of the stress at Evergrande when it imposed new rules last year, known as the “three red lines,” requiring developers to bring down debt levels before they could borrow more.
The rules squeezed Evergrande, which had borrowed heavily as it expanded aggressively in recent years, including into businesses such as healthcare and theme parks.
Evergrande’s billionaire founder, Hui Ka Yan, presented a survival strategy at a company meeting in late October, saying Evergrande would turn an electric-vehicle unit into its core business within a decade, while drastically cutting property sales by more than two-thirds, the state-owned Securities Times reported.
The EV business hasn’t yet generated any revenue from car sales. Although Evergrande recently avoided defaults on some of its dollar bonds by making overdue payments shortly before the end of 30-day grace periods, it remains on the hook for more payments in coming months, including several overdue payments with final deadlines this week.
Officials involved in Evergrande’s cleanup say they believe they have sufficient tools and experience to pull it off without seriously harming the property market, according to people familiar with the matter. They say Beijing has become more adept at managing private-sector meltdowns after handling others in recent years, including conglomerate HNA Group Co.
The risk for Beijing is in overestimating its ability to engineer outcomes in the economy, especially given Evergrande’s size.
The real-estate market is so entwined with China’s economy that any missteps could be dangerous. Home sales have fallen sharply recently, as buyers have become unnerved about the ability of many developers to stay afloat.
Falling land sales to developers are another concern, since such sales are a major source of public funds, accounting for more than 30% of local government revenue in 2020, according to financial-services firm Nomura.
Evergrande’s financial troubles have helped spark a huge selloff in the bonds of Chinese developers. At least six have either defaulted on their dollar debt or asked investors to wait longer for repayment, as credit market conditions have made it impossible for them to sell new bonds.
The average yield on an ICE BofA index of Chinese high-yield bonds this week reached nearly 28%, its highest since the 2009 global financial crisis, reflecting extreme risk aversion among investors.
Regulators recently tried to shore up confidence in Chinese debt markets by publicly encouraging firms to meet offshore debt obligations.
At the same time, authorities have started to moderate some of the stringent measures designed to tame the country’s property boom. State media reports that some regions have scrapped curbs on mortgages. Local governments are also extending subsidies to home buyers and acting to prevent prices from declining.
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
Private club memberships and luxury cars are some of freebies on the table.
When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.
“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”
Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.
According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.
In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.
“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”
Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”
Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”
A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.
The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.
“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer. “We wanted to include the cars as part of the package for our more exclusive units.”
The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.
Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.
But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.
It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.
“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”
On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”
Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.
Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.
There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.
When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”
Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.
The family moved in a few months later.