About 2 years ago, I discussed China’s property crash and how one of China’s biggest property developers earned the unenviable title of the worlds most indebted property developer. At that time, Evergrande carried liabilities of $A410 billion (yes that’s right, billion). That has now grown to $A525 billion and they filed for bankruptcy (in the US) in Aug 2023. To give you some perspective, the state of Victoria has net debt of about $A116 billion, but then again China is a country of over 1.4 billion people.
Now another of China’s mega property developers, Country Garden are taking the headlines for all the wrong reasons. In late 2022 they had total liabilities of around $A300 billion and reported an operating loss of $A10.35 billion for the first half of 2023.
Country Garden has over 3,000 development projects in about 300 Chinese regions with a more of a provincial focus than Evergrande. Because of the declining property market, they are unable to sell completed stock or future development sites. They also have a large portfolio of partly completed projects which are very problematic. Behind Country Garden are a trail of other property developers battling similar issues.
The impact on the property market is compounding. Economic data released this month shows property values (on a rate per sq m of floor area) were down 28 percent on last year. Sales volumes have also declined by a similar percentage.
It is however, the contagion and knock on effect from the potential collapse of these mega groups that poses the greatest risk. The property sector in China was once reported to generate about 30% of China’s GDP. It’s decline across every stage of the property cycle will be felt hard economically in Beijing. The impact of the debt burden on banks and the secondary banking sectors is also problematic.
A bit like some Australian building societies of the 70’s and 80’s, the secondary lending market in China raises funds from individuals and companies at a higher interest rate and then invests in a range of assets including property developments. Many of these second-tier lenders are struggling and the investors are unlikely to see much of their capital returned.
Then there is the drop in revenue streams to services and local governments who will miss out on projected activity and so the impact continues.
The Peoples Bank of China (PBoC) has been cutting China’s Loan Prime Rate for the last 5 years bucking the trend of most Western Central Banks. This has been in a direct effort to ease the pain and stimulate activity.
China’s Three Red Line policy introduced in Aug 2020 for the property sector was designed to reduce debt, limit runaway apartment pricing and lift standards. This may have limited the fallout, but it looks like the die was cast. Now Beijing need to decide if they will support these property development behemoths to muddle through for years with prolonged pain or let them fail and deal with the consequences.
So, what does this mean for the Australian apartment market? Not a great deal in direct terms. More broadly the Chinese property slump is dragging down the Chinese economy. China is Australia’s largest trading partner (25.9% of exports) so its decline impacts Australia’s economy. The search is on by all exporters to find alternate markets.
If property investment and development is out of favour amongst the Chinese community, they may be less enthusiastic about buying property elsewhere in the world. Then again the sale of off-the-plan apartments in Australia to anyone (including Chinese) has been slow for the last few years so there is no impact there. Also, we have not seen a rise of mainland Chinese selling apartments. So far it looks like their strategy to diversify their investments with Australian property remains in place.