Commentary on Political Economy

Friday 5 November 2021

China property/Kaisa: fire sale could spark broader real estate price decline    
Suspension of developer’s shares offers another signal of sector’s worsening debt crisis As Evergrande has shown, sales of anything related to Chinese developers are proving difficult 

 Evergrande no longer tops the list of concerns for investors in Chinese real estate. Kaisa Group’s shares were suspended on Friday, after an affiliate of the Shenzhen-based developer missed an interest payment. This provides another signal of the rapidly worsening local property debt crisis. The developer’s missed payments should worry the market more than the defaults last month by smaller peers including Fantasia, Sinic and Modern Land. Kaisa has more offshore debt than any local developer other than Evergrande. Of Kaisa’s roughly $11bn in dollar bonds, about a third come due in the next 12 months. It helps that Kaisa’s assets sit mostly in prime locations such as Hong Kong and Shenzhen. Its reported plans to sell off real estate projects and its property management unit Kaisa Prosperity would help it cover the most urgent debt repayments, including the $400m due next month. Yet as Evergrande has shown, sales of anything related to Chinese developers are proving difficult. Even the attempted sale of Evergrande’s profitable property management unit fell through despite government officials brokering the sale. It still struggles to find buyers for key property assets. The share price of Hong Kong-listed Kaisa has dropped almost three-quarters this year, reflecting the bleak outlook. Worse, government support also looks increasingly unlikely. Restrictions on indebted developers make it difficult for them to borrow fresh funds for refinancing. Beijing has also signalled it has little intention of propping up the sector by expanding its trial plans for a property tax. Kaisa has begun a fire sale of its assets in Shenzhen, mainland China’s priciest residential property market. This move could have a significant knock-on effect on real estate prices in the rest of the country. Meanwhile, the property tax, at present being piloted in Shanghai and Chongqing, will roll out to other cities. The levy, which covers all residential and non-residential properties, will weigh on property prices and transactions. China’s real estate market still looks wobbly. Expect more cash flow difficulties for developers.

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