Empty Buildings In China’s Provincial Cities Testify To Evergrande Debacle
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Empty Buildings In China’s Provincial Cities Testify To Evergrande Debacle

The property giant borrowed heavily to develop in out-of-the way places like Lu’an.

By Yoko Kubota
Tue, Oct 5, 2021 10:48amGrey Clock 7 min

LU’AN, China—Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind.

Elsewhere in Lu’an, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. A planned $4 billion electric vehicle plant, central to local leaders’ economic dreams, remains a steel frame with overgrown vegetation spilling into the road.

The structures are monuments to the once-grand ambitions of China Evergrande Group, now among the world’s most indebted property companies, and a case study in how China’s dependence on real estate as an economic engine helped feed those ambitions.

Evergrande is in trouble in part because it developed properties aggressively in places such as Lu’an, where its debt-fueled building spree came as the city’s population dwindled. It launched hundreds of projects across more than 200 Chinese cities.

As it expanded, Evergrande racked up more than US$300 billion in liabilities. In September, it said it was facing unprecedented difficulties and was trying to protect customers. Days later, it missed a scheduled interest payment to overseas bondholders. On Monday, Evergrande and its property-management unit halted trading in Hong Kong; the unit said it could be subject of a takeover bid, which could bring in much-needed cash for Evergrande.

The company’s troubles are among the impacts unfolding since Beijing, concerned about risks to the financial system, last year began forcing developers to start cleaning up their balance sheets. Global investors are worried the crackdown could trigger financial-market distress or a protracted real-estate downturn. People who bought units in unfinished towers are wondering where their money went.

“We spent all our family’s savings on this apartment,” said a 59-year-old farmer surnamed Jiang, who, like other buyers in Lu’an, didn’t want to provide her first name because she is worried about upsetting the company.

In August, she said, she bought a unit for 890,000 yuan (approx. $189,000) in an Evergrande project called Junting, or “Jade Palace,” with 47 apartment buildings. Work halted months ago, locals said. Ms. Jiang said she didn’t know when—or if—it would restart. “We really don’t know what to do,” she said.

Evergrande has completed many projects in Lu’an over the past decade and turned homes over to buyers. An Evergrande spokesman said the company would do everything possible to ensure completion of its projects “wherever the city or region is.” Lu’an officials didn’t respond to requests for comment.

Central to Evergrande’s expansion was a real-estate economy across China in which people from developers to financiers to city leaders had an incentive to perpetuate the boom. Evergrande found a market for its projects among a range of buyers—including corporate employees and farmers seeking to move to more urban areas—who believed values would rise no matter what and assumed Beijing would protect them against decline.

For local leaders, developers represented a revenue stream. With limited power to tax, Chinese cities get roughly a third of their revenue from selling land to property developers like Evergrande. Cities annex farmland to sell to developers; farmers often get to buy apartments at a discount.

Real estate became some cities’ biggest economic driver and the most important source of revenues. Lu’an’s take from land sales totalled US$1.2 billion in the first half of this year, compared with total tax revenue of US$900 million.

But property construction in smaller cities ran well ahead of demand from prospective occupants for the last five years in China, leaving the market increasingly dependent on speculators and investors to buy properties, said Logan Wright, China markets research director at Rhodium Group, a research firm based in New York. About 21% of homes in urban China were already vacant in 2017, which equated to 65 million empty units, according to data from China Household Finance Survey.

As China cracks down, new-home construction has slowed and housing prices are falling in many places. Local governments’ land-sales revenues fell by 17.5% in August from a year ago, according to Rhodium Group.

A sharp deceleration in China’s property market could “exacerbate and amplify downward pressure” on the job market and China’s overall economy, Goldman Sachs economists warned in a recent note. By some estimates, real-estate-related activity now accounts for nearly one-third of China’s economy.

Most economists and investors believe China’s government will restructure Evergrande. Late last month, the People’s Bank of China said it would “maintain the healthy development of the property market and safeguard the legitimate rights and interests of house buyers.”

Still, economists say there will be lost economic activity if Beijing continues to drain away excess debt and root out speculation in real estate.

Some Evergrande projects appear to have fared better in bigger cities. Some Chinese media have reported that while it halted construction on some developments in Guangzhou in southern China, construction on some projects resumed in late September.

Lu’an has lost 5% of its population in the past 10 years. Among Lu’an’s four million people, many are over 60 and residents’ average annual disposable income of $3,500 is below the national average of around $5,000, government data show.

Yet from around 2011 through 2020, Evergrande invested more than $10 billion and launched multiple major projects in Lu’an, including residential complexes, the EV plant and the “Fairyland” theme park featuring pastel-coloured European-style pedestrian blocks and a mélange of animal characters, including a reindeer-like creature and a blue dragon.

Four unfinished Evergrande projects in Lu’an that The Wall Street Journal visited in late September appeared to have stopped construction. Nearby store owners described the loss of business after construction workers stopped showing up. In one Evergrande office, staff took naps or huddled over smartphones.

At least 23 lawsuits involving commercial bills—a form of IOU among Chinese businesses—have been filed this year against Evergrande’s subsidiaries in Anhui province, where Lu’an is located, according to a Journal search on Tianyancha, a corporate database in China. Plaintiffs included makers of paint, cable, concrete and elevators as well as construction companies. The Journal couldn’t find any such lawsuits in the previous year in the database.


Evergrande was founded in 1996 in Guangzhou by Xu Jiayin, who local media says grew up in a poor village as a woodcutter’s son. He became known as Hui Ka Yan, his name in Cantonese.

Mr. Hui expanded Evergrande into a nationwide powerhouse with more than 150,000 workers, reporting record sales year after year as home prices soared. Evergrande’s share price grew more than fivefold in 2017, a year Mr. Hui temporarily became China’s richest man, according to research firm Hurun Report.

The company raised money in part by preselling units to home buyers for cash upfront who then waited for the buildings to rise. Its creditors include buyers of 1.4 million apartments that Evergrande presold and promised to build but hasn’t yet completed, estimates research firm Capital Economics. Evergrande also borrowed from banks and foreign investors.

It expanded beyond real estate, getting into mineral-water production and buying a professional soccer club. It joined the electric-vehicle industry with a Hong Kong-listed EV unit, China Evergrande New Energy Vehicle Group Ltd., whose market capitalization once hit $87 billion, more than most global automakers at the time.

In 2017, it entered the theme-park business, launching 15 projects nationwide involving more than $100 billion in total investment, according to Journal calculations based on local-government numbers. Around that time, Dalian Wanda Group, a conglomerate that had vowed to out-compete Disney parks in China, said it was retreating from the business after running up too much debt.

Principal cities like Beijing and Shanghai kept a tight grip on land supply for new construction, so Evergrande—like many other developers—turned to smaller and more out-of-the-way cities like Lu’an with plenty of land to sell.

When Evergrande began buying land around Lu’an around 2011, it was a sleepy place known mainly for Lu’an Melon Seed Tea. Evergrande launched at least a half-dozen major residential projects in the area while other major developers also rushed in.

Buyers often queued up for hours or went through lotteries to angle for apartments. A senior Anhui province official in 2012 publicly praised Evergrande, local media reported, saying its “strengths in scale and brand name make it a dragon-head-like enterprise in China with international influence.”

Between 2019 and the end of September 2021, Evergrande was Lu’an’s biggest developer based on the number of apartments sold before their construction work was completed, with 8,123 new apartments presold, according to Journal calculations using information from Lu’an’s housing authority.

Evergrande added commercial buildings and a movie theatre. In 2019, it bought 14 more lots in Lu’an, driving the city’s land sales to over $2.6 billion that year, according to Anhui Land Information Network, a research firm tracking government land auctions. The sales helped prompt the local government to increase its fiscal-revenue budget for the year three times.

Evergrande around that time chose Lu’an for one of its EV subsidiary’s plants. Evergrande said it would produce as many as 500,000 cars, generate $15.5 billion in industrial output each year and contribute $1.2 billion in annual tax revenue for the local government, according to local media.

As residential projects rose and residents moved into completed projects, Lu’an transformed into urban sprawl stretching across about 6,000 square miles, with housing-block rows surrounded by farmland. New York City is about 300 square miles.

Cash crunch

Evergrande faced cash crunches over the years but always overcame them. Then Beijing announced plans in August 2020 to crack down on developers’ excessive borrowing via the “three red lines,” limits that kept the company from taking on new debt.

Evergrande’s real estate, theme park and EV subsidiaries each recorded losses during the first half of 2021. Cash became so short the company this summer started paying some suppliers with unfinished apartments, the Journal has reported. In Lu’an, complaints flooded into the local government website, with some buyers of unfinished homes fearing they would lose their life’s savings or be homeless in retirement.

Among the projects whose construction appeared halted last month was a large unfinished portion of Evergrande’s Yujingwan, or “Imperial Scenery Bay,” a complex spanning several blocks. Across the street, a woman giving her name as Ms. Wang, 41, was selling beverages and foodstuffs one recent day at a convenience store she opened in 2017.

Ms. Wang said she bought an apartment last year for more than 400,000 yuan in the complex’s so-called Sixth Phase after Evergrande offered a roughly 35% discount. She borrowed from friends and relatives to buy the new home, which she said is supposed to be ready in 2023.

She said she believes the government, or perhaps a state-owned enterprise, will step in to finish the project. Other buyers echoed that belief.

It isn’t clear where the money that developers like Evergrande collected from home buyers through presales has been going. In many cases, the Journal has reported, developers use that cash as general funding for operations.

The Evergrande theme park was partially operating on the late-September visit, with some small-scale attractions and a handful of restaurants open. Incomplete apartments towered over the park. The carousel was closed.


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But as house prices increase across the country, the conversation has started to shift from size for the sake of it towards more flexible, well-designed spaces better suited to contemporary living.

For the owners of this 1920s weatherboard workers’ cottage in Fremantle, the emphasis was less on having an abundance of room and more about creating cohesive environments that could still maintain their own distinct moods. Key to achieving this was manipulating the floorplan in such a way that it could draw in light, giving the impression at least of a larger footprint. 

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Positioned on a site that fell three metres from street level, the humble four-room residence had been added to over the years. First order of business for local architect Philip Stejskal was to strip the house back to its original state.

“In this case, they were not quality additions,” Stejskal says. “Sometimes it is important to make sure later additions are not lean-tos.”

The decision to demolish was not taken lightly. 

“Sometimes they can be as historically significant as the original building and need to be considered — I wouldn’t want people to demolish our addition in 50 years’ time.”

Northern light hits the site diagonally, so the design solution was to open up the side of the house via a spacious courtyard to maximise opportunities to draw natural light in. However, this had a knock-on effect.

A central courtyard captures northern light. Image: Bo Wong

“We had to make space in the middle of the site to get light in,” Stejskal says. “That was one of the first moves, but that created another issue because we would be looking onto the back of the neighbouring building at less appealing things, like their aircon unit.”

To draw attention away from the undesirable view, Stejskal designed a modern-day ‘folly’.

“It’s a chimney and lookout and it was created to give us something nice to look at in the living space and in the kitchen,” Stejskal says. 

“With a growing family, the idea was to create a space where people could find a bit of solitude. It does have views to the wider locality but you can also see the port and you can connect to the street as well.”

A garden tap has also been installed to allow for a herb garden at the top of the steps.

“That’s the plan anyway,”  he says. 

A modern day ‘folly’ provides an unexpected breakout space with room for a rooftop herb garden. Image: Bo Wong

Conjuring up space has been at the core of this project, from the basement-style garaging to the use of the central courtyard to create a pavilion-like addition.

The original cottage now consists of two bedrooms, with a central hallway leading onto a spacious reception and living area. Here, the large kitchen and dining spaces wrap around the courtyard, offering easy access to outdoor spaces via large sliding doors.

Moments of solitude and privacy have been secreted throughout the floorplan, with clever placement of built-in window seats and the crow’s nest lookout on the roof, ideal for morning coffee and sunset drinks.

The house has three bedrooms, including a spacious master suite with walk-in robe and ensuite overlooking the back garden. Adjustable blades on the bedroom windows allow for the control of light, as well as privacy. Although the house was designed pre COVID, it offers the sensibility so many sought through that time — sanctuary, comfort and retreat.

Adjustable blades allow the owners to control light on the upper floor. Image: Bo Wong

“When the clients came to us, they wanted a house that was flexible enough to cater for the unknown and changes in the family into the future,” Stejskal says. “We gave the owners a series of spaces and a certain variety or moods, regardless of the occasion. We wanted it to be a space that would support that.”

Mood has also been manipulated through the choice of materials. Stejskal has used common materials such as timber and brick, but in unexpected ways to create spaces that are at once sumptuous but also in keeping with the origins of the existing building.

Externally, the brickwork has been finished in beaded pointing, a style of bricklaying that has a softening effect on the varied colours of bricks. For the flooring, crazy paving in the courtyard contrasts with the controlled lines of tiles laid in a stack bond pattern. Close attention has also been paid to the use of veneer on select joinery in the house, championing the beauty of Australian timbers with a lustrous finish. 

“The joinery is finished in spotted gum veneer that has been rotary cut,” says Stejskal. “It is peeled off the log like you peel an apple to give you this different grain.”

Rotary cut timber reveals the beauty of the natural grain in the kitchen joinery. Image: Bo Wong

Even the laundry has been carefully considered.

“The laundry is like a zen space with bare stone,” he says. “We wanted these different moods and the landscape of rooms. We wanted to create a rich tapestry in this house.”

The owners now each experience the house differently, highlighting separate aspects of the building as their favourite parts. It’s quite an achievement when the site is not enormous. Maybe it’s not size that matters so much after all.


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