As real estate market slumps, Chinese developer gets a lifeline
HONG KONG — One of China’s largest homebuilders has secured a critical backstop from a group of mainly state-run banks, as pressure mounts on cash-strapped developers in a slumping real estate market.
Evergrande Real Estate Group, a heavily indebted builder controlled by the colorful billionaire Hui Ka Yan, said Tuesday that it had secured new credit lines since February of 100 billion renminbi, ($16.2 billion). That included a new, 30 billion renminbi commitment on Monday from the Bank of China, which regards the developer as “its most important bank-wide longterm partner,” Evergrande said in a news release.
Chinese developers are rushing to shore up financial support in the face of a deepening decline in the nation’s sprawling housing market, once a key driver of economic growth. Sales volumes and housing prices are plunging, weighed down by a growing overhang of unsold homes.
The strain is being felt by other developers like the Kaisa Group, once a favorite of foreign investors,
which nearly defaulted on its offshore debt this year before being rescued by another developer.
Evergrande is one of China’s biggest developers, with sales last year of more than 130 billion renminbi.
But it is also one of the most indebted, borrowing heavily from foreign investors in the United States dollar offshore market — debts that become more expensive to repay as the renminbi weakens.
Analysts said the support from the banks — which also include the Agricultural Bank of China, Postal Savings Bank of China and China Minsheng Bank — would provide short-term relief but failed to address the company’s deeper problems.
Mounting debts and slumping sales “are fundamental challenges that can’t be resolved short-term by government’s bailing them out on ‘ too big to fail’ pretense,” said Junheng Li, the head of research at JL Warren Capital in New York.
“The company has been under financial distress for a long time,” she added.
A spokesman for Evergrande did not return phone calls and emails seeking comment Tuesday.
The Chinese leadership is concerned about the health of the country’s property market because it is so deeply interconnected with other parts of the economy. Real estate is an important driver of steel consumption, loan growth and jobs — both for sales agents and migrant construction workers. A drop in home prices hurts ordinary Chinese because they tend to invest a disproportionate amount of their savings in real estate.
On Wednesday, China was to publish a monthly survey on residential property price trends in 70 major cities, which is expected to reflect the slump. In January, prices had fallen in 64 cities when compared with December. Data released last week showed new housing starts, measured by floor space, fell 20 percent in the first two months of the year compared with a year earlier, while new land purchases by developers fell 32 percent.
“The market is still undergoing a pretty rough time and what that means for developers is that the operating environment will remain tough,” Franco Leung, a vice president at Moody’s Investors Service in Hong Kong, said Tuesday in a phone interview.
Leung said that Evergrande’s new credit lines would help give it another source of liquidity, but that the company was already one of the most highly indebted developers in China.
“We are monitoring their level of debt buildup quite closely,” he said.
Evergrande had total borrowings of 151.8 billion renminbi at the end of June, the most recent figures available. But that figure did not include an additional 44.5 billion renminbi worth of perpetual bonds, so-called because they have no fixed repayment date, which the company carries on its books as equity.
Evergrande was founded in 1996 as a builder of middleclass homes outside prime neighborhoods by its chairman and majority shareholder, Hui, who also goes by Xu Jiayin. The company started with projects in and around its home city of Guangzhou, in southern China, before expanding nationally to more than 100 cities.
In recent years, it has branched into new businesses, including bottled mineral water and a professional soccer team. Last summer, Hui sold a 50 percent stake in the soccer club to the e-commerce giant Alibaba Group. Alibaba’s founder, Jack Ma, said at the time that he agreed to the nearly $200 million deal in a snap decision, after Hui got him drunk.
Evergrande’s balance sheet has drawn criticism before. In 2012, the short-seller Citron Research published a report saying the company was insolvent, accusing Evergrande of presenting fraudulent information to investors. In a twist, Hong Kong’s securities regulator late last year accused Citron of publishing false and misleading information about Evergrande.
That case was scheduled for a hearing Wednesday at Hong Kong’s market misconduct tribunal.
This month, Evergrande had a run in with the Australian government. The Australian treasurer, Joe Hockey, ordered the company to sell a $30 million mansion in Sydney called Villa del Mare that it was found to have acquired illegally.
Evergrande acquired the villa “via a string of shelf companies,” in Australia, Hong Kong and the British Virgin Islands. The purchase was illegal because foreign investors are required to notify the treasurer before purchasing real estate. They can build new homes, but are barred from buying existing ones.
“We welcome all foreign investment that is not contrary to our national interest,” Hockey said in a March 3 news release.
Evergrande has 90 days to find a buyer for the property.