Evergrande and the Future of Chinese Real Estate

Author: Shreyansh Jindal, Graphic: Nina Tagliabue

The BRB Bottomline

One of the biggest global real estate developers, China’s Evergrande Group is facing severe financial problems. What does it mean for the future of the Chinese real estate market?

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China’s real estate market accounts for nearly one-third of the country’s GDP. The Evergrande Group, the biggest real estate developer in the country, has recently suffered huge losses and defaulted on several loan repayments. In Lu’an, a city close to Shanghai, there are several rows of residential towers whose construction remains unfinished. A huge area of land devoted to the construction of a theme park and an electric vehicle manufacturing unit stands empty. Yet, these were just some of the projects undertaken by China’s Evergrande Group, a company that now faces the threat of survival.

How did Evergrande’s Downfall Begin?

The downfall of this real-estate company began as a result of the age-old enemy: debt. In 2016, Evergrande was once one of the most valuable companies in China based on market valuation, making it to the Fortune Global 500 list. Now, its $300 billion of accumulated debt is greater than its current market value. Evergrande had been accumulating debt for years. Following the Chinese government’s decision to enforce stricter borrowing laws for real-estate developers in October 2021, Evergrande was forced to sell off a large share of its property holdings at a discount. 

This is where things started turning against the real estate giant. 

Since raising capital became more difficult, Evergrande is not able to carry out several real estate projects in which the company has already invested. The Chinese government had for-long favored the growth of real estate developers like Evergrande since nearly one-third of its domestic revenue was generated from selling land to property-owning companies. However, when signs of instability started showing in November 2021, the government imposed stricter regulations on companies in the real estate sector. Governments may help big debt-ridden companies by offering them a bailout, however the Chinese government has been encouraging state-owned firms to buy Evergrade’s assets, confirming its stance against bailout.

The Future?

In order to compensate for the shortage in liquidity that the company was facing, Evergrande decided to sell a large chunk of its shares to large private stakeholders. Ultimately, Evergrande sold close to 5.7% of its stock to HengTen Networks, which helped raise the company approximately $145 million. 

However, a significant portion of its debt remains unpaid. The Evergrande Group currently owes money to over 250 financial firms and banks. If the debt remains unpaid, banks will turn skeptical of lending out money to private companies and individuals, which in turn, would be a deterrent to the growth of the Chinese economy. This is a similar situation to the collapse of Lehman Brothers in 2008, where the fall of one firm resulted in destabilizing one of the biggest economies in the world.

The fall of Evergrande has brought structural changes to the Chinese real-estate market. What’s interesting about the future of real estate in China is the new proposition of property taxes in China. Some critics predict that the new proposed property tax will cause the real estate market in China to crash; however, such a scenario is unlikely. China has imposed one of the most stringent speculations on property purchases in the world. The downfall of Evergrande happened in part due to the supply chain problems caused by COVID-19 and also due to the ease of buying real estate without credit checks and financial regulations. Now that the buyer’s social contribution is assessed, there will be a theoretical limit to the number of additional homes an individual can purchase, and the initial down payment requirements by law have increased significantly. In an industy like real estate, which is dominated by a few companies, the downfall of a single corporation can have a multiplying negative effect. The new proposed laws on property taxes will eventually help China build a real estate market that is more reliable and stable. 

Take-Home Points

• The Evergrande Group, the biggest real estate developer in China, is facing a financial crisis that is causing it to share property and shares at a discount.
• A large portion of the debt is unpaid to this date, which means that the company might have to continue selling its shares and realize losses.
• The fall of Evergrande might make it difficult for people and companies to borrow money from banks as lending regulations will likely be made more stringent.
• The Chinese government is in the process of introducing a new property tax that would make it more difficult for people to own multiple homes and reduce the problem of empty spaces in the country.