THELife is not that great for China Evergrande Group. This does not mean the blues for American property investors or owners, however.
The Chinese real estate giant is grappling with more than $ 300 billion in liabilities and $ 88.5 billion in debt, which has alarmed the world that China is experiencing its own ‘Lehman moment’. referring to the 2008 bankruptcy of investment bank Lehman Brothers in the United States which led to a global financial crisis.
Due to the collapse of China’s second-largest private real estate developer, many stock market indices fell in the past month. Families who have invested their savings in unfinished pre-sold homes, along with suppliers, contractors, employees, creditors and banks, have lost significant sums.
But, there are signs that the real estate developer’s debt problems are contained overseas and will not affect commercial real estate in the United States much.
“It doesn’t compare to the plight of a large financial institution, where there can be direct exposures around the world,” said economist Sam Chandan, dean of the University’s Schack Institute of Real Estate. from New York. “The exposure of US institutions to the portfolio would be limited.”
US Federal Reserve Chairman Jerome Powell last month allayed fears about international exposure to the Evergrande collapse.
“In terms of the implications for us, there isn’t a lot of direct exposure in the United States,” Powell told reporters after the Fed’s September 22 policy meeting, according to Reuters. “The big Chinese banks are not extremely exposed, but you’d be concerned that it would affect global financial conditions through global trust channels and that sort of thing. But I wouldn’t draw a parallel with the corporate sector in the United States.
The Hong Kong-listed Evergrande group, which has more than 100,000 employees, has more than 1,300 developments (800 of which are said to be incomplete) in more than 280 cities in China, according to its website. Its holdings include the 2,000-acre Ocean Flower Island artificial archipelago (equivalent to three LaGuardia airports) under construction in Hainan, and Evergrande Huazhi Plaza in Chengdu, which includes a shopping mall, office tower, St. Regis hotel and residential units. As Evergrande, Asia’s leading junk-bond transmitter is ranked 122nd on Fortune’s Global 500 list with $ 73.5 billion in revenue at the start of August. Evergrande did not respond to a request for comment.
In a letter to employees from Evergrande President Xu Jiayin, which was leaked online on September 21, the company chief tried to reassure his employees by saying, “I am confident that through the joint efforts and hard work of leaders and employees at all levels, Evergrande will surely come out of the shadows ASAP.
Like other real estate companies, Evergrande has been hit by the pandemic, in addition to Beijing’s debt crackdown and new restrictions on home sales. As has been reported, the debt-laden shares of the company have lost over 80% of their value this year.
The fate of Evergrande, listed on the Hong Kong Stock Exchange, is unclear as the company is on the brink of default and Beijing is not stepping in to bail it out.
But the Shenzhen-based company has maneuvered to avoid some of its financial problems.
Evergrande made domestic interest payments to creditors as China’s central bank pumped money into the banking system, despite defaulting on its interest payment to offshore bondholders, Reuters reported. Meanwhile, Evergrande said it would sell a 20 percent stake in a regional bank to the local government in Shenyang for the equivalent of $ 1.55 billion, with the proceeds being used to settle debts with the lender. Finally, Evergrande engaged Houlihan Lokey and Admiralty Harbor Capital to jointly advise on the restructuring of the developer’s finances.
Evergrande is part of a sector that accounts for up to 28% of the Chinese economy, according to the Financial Time. While real estate has been in a “bubble” for 15 years, cracks are starting to appear as a result of the government’s “crackdown on risky real estate developers,” said Sara Hsu, visiting researcher at Fudan University of Shanghai. “I think a lot of people are aware of the housing bubble in China, but it was not vulnerable because the government did not allow it.”
The problem is that with few other good assets to fund, “investors keep buying properties and prices keep going up,” added Hsu, an expert in Chinese fintech, economic development, informal finance and shadow banking. .
The potential collapse of Evergrande could lead to a slight increase in Asian real estate investment in the United States.
Alex Foshay, vice president and division head of international capital markets at Newmark, said that while his team has not seen capital flows from mainland China, there are real estate investors from Hong Kong who are looking “seriously in the United States”. is aimed at wealthy investors in Taiwan, a group of buyers “we’ve never seen before,” he added.
For example, at the end of August, Taiwanese company Skyline Group International acquired Glen Bell Way in Irvine, Calif. From LBA Realty for $ 159 million. Foshay secured the buyer of the three-building, 273,180-square-foot site that is best known for housing the headquarters of the Taco Bell fast food chain.
So what will happen to Evergrande?
Hsu thinks the government will intervene to avoid collapse and stabilize things.
“The government is likely to force Evergrande to repay as much of its debt as possible, and [will] intervene at the last minute to consolidate obligations that could create systemic risk if not met, ”she said.
CBRE predicts that the Chinese company is likely to undergo restructuring and reorganization, according to a research note on Evergrande.
“Such restructuring will likely force lenders and investors, especially holders of foreign bonds, to reduce the debt owed to them,” the document said. “CBRE believes the most likely scenario is for the Chinese central government to extend domestic bank loan debt maturity and liquidity to selected developers who adhere to the three red lines policy. [which caps borrowing] to avoid a wider ripple effect on the economy and the real estate market.
“In the case of Evergrande, the divestiture of assets will be a viable strategy for the company to meet its short-term commitments.”