Tremors from China’s real estate crisis are just starting
Chinese investors and their creditors are putting up “For Sale” signs on real estate holdings across the globe as the need to raise cash amid a deepening property crisis at home trumps the risks of offloading into a falling market. The prices they get will help finally put hard numbers on just how much trouble the wider industry is in.
The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1 trillion off office property values alone, Starwood Capital Group Chairman Barry Sternlicht said last week. But the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data to go on. Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts.
Regulators and the market are nervous that this logjam could be concealing large, unrealized losses, spelling trouble both for banks, who pushed further into bricks and mortar lending during the cheap money era, and asset owners.
New York Community Bancorp touched a 27-year low on Tuesday after slashing its dividend and stockpiling reserves in part because of troubled real estate credit. The European Central Bank is concerned that banks in the region have been too slow to mark down the value of loans and the UK’s Financial Conduct Authority is to review valuations in private markets, including real estate.
Now, a new batch of overseas assets acquired in a decade-long Chinese expansion spree are starting to hit the market as landlords and developers decide they want cash now to shore up domestic operations and pay off debts—even if that means taking a financial hit. Beijing’s crackdown on excessive borrowing has left few developers unscathed, even those once considered major players.
A unit of Guangzhou-based China Aoyuan Group Ltd., for example, which is in the middle of a $6 billion debt restructuring plan, sold a plot in Toronto at about a 45% discount to the 2021 purchase price late last year, according to data provider Altus Group.
“With motivated sellers, the market freeze could thaw, improving transparency and price discovery,” said Tolu Alamutu, a credit analyst at Bloomberg Intelligence. “Portfolio valuations may have further to fall.”
With every transaction, the market gets more clarity about the capitalisation rate—a measure of the return an investor is willing to do a deal at. That data will then be used by appraisers to value other assets, which could trigger wider impairments. As a consequence, landlords may have to inject more money to cure any loan-to-value breaches or risk having the properties seized by lenders.
While so far there has only been a trickle of Chinese-owned sales in Europe—last year a London office building linked to Shimao Group Holdings Ltd. Chairman Wing Mau Hui sold for about a 15% discount to an earlier sale agreed in 2022 that did not close, according to a person with knowledge of the matter—the volume is starting to grow again.