The Endless Cleanup at China’s Most Indebted Property Developer
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The Endless Cleanup at China’s Most Indebted Property Developer

China Evergrande Group feels the heat again as plans to reduce leverage rapidly.

By Mike Bird
Tue, Jun 8, 2021 10:48amGrey Clock 2 min

Dogs bark, horses neigh, and investors worry about the financial health of China’s most leveraged property developer. The pattern is almost uncannily routine, but the latest drama at China Evergrande Group still bears watching.

The most recent wobble relates to the company’s relationship with Shengjing Bank, a regional lender in which it began buying a stake five years ago. Mainland Chinese media reports suggested that regulators are examining the bank’s transactions with Evergrande. Last week Chinese regulators warned that some small and midsize banks had exploited restrained property lending by their larger peers to expand their own exposure.

The company said on Monday that its financial links with Shengjing Bank were legally sound. Last week, Evergrande Chairman Hui Ka Yan promised to get on the good side of one of the government’s three red lines for property-developer leverage by the end of the month, doubling down on plans in the company’s last annual report.

Markets don’t seem entirely convinced that all is fine. On Friday, the yield on Evergrande’s dollar bonds maturing in March next year reached 19.8%. That is not anything like the near-30% levels of September last year, during the last panic about the company’s financial future, but it is up by more than 10 percentage points in the past two weeks.

For investors, Evergrande has been both a dream and a nightmare. The company’s stock is borderline uninvestable for bulls and bears alike, swayed regularly by buybacks and highly concentrated ownership. But its bonds, perpetually priced as if the company is at serious risk of collapse, have been enormously profitable for iron-stomached believers in the company’s political nous.

That doesn’t mean its frenetic business model won’t catch up with it eventually. Paying down some of its mountain of debt sounds like a good idea. So why hasn’t Evergrande done it before? The simple answer is that the company’s business model requires relentless growth and constant financing. Its compound revenue growth rate over the past decade is around 35% a year, outstripping that of U.S. tech giants like Apple and Amazon.

Paying off its debts is not a matter of simply trying harder; it needs to find money to do so. The most obvious route is to lean on less organized creditors instead of banks and bond investors. At the end of 2020, the company had over 1 trillion yuan (A$201 billion) in trade payables and contract liabilities, owed to suppliers and home buyers respectively, up almost 20% from a year earlier. The contract liabilities figure is one to watch in particular.

Unless bearish investors think they have some specific political insight that has escaped even the sector’s insiders, there is no point trying to guess which minor crisis might finally deal the company a more serious blow. But just because it can’t be timed, doesn’t mean that the day won’t eventually come.



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Stronger demand in some areas is pushing unit rents up faster than houses

By Bronwyn Allen
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Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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