BOFIT Weekly Review 2015/03
Problems of China’s largest real estate developers could affect financing possibilities for the entire sector
Kaisa Group Holdings, a real estate developer listed on the Hong Kong stock exchange, defaulted on a $52 million bank loan payment at the end of December. Last week, the firm became the first major Chinese developer to default its foreign bond servicing, when it missed $23 million in coupon payments. Several of Kaisa’s top management have resigned, trading in Kaisa shares has been suspended, the price of its foreign bonds have collapsed and its bank accounts frozen, taking the company yet another step closer to bankruptcy.
For a company still renowned for healthy profitability six months ago to get into so much trouble so quickly raises a number of disturbing questions. Foremost is whether Kaisa’s problems merely reflect bad decisions on the part of a single private enterprise or are they symptomatic of deeper problems running throughout China’s real estate sector. Apartment prices continued to decline in December and during the holiday season around the turn of the year, sales volumes in large cities were less than half of what they were a year earlier. The slowdown in the housing market has hit highly leveraged builders particularly hard, and several developers encountered financial difficulties last year. Headlines reporting the resignations and arrests of leading figures in these enterprises hardly helped given widespread public suspicions of e.g. crooked land deals in the real estate sector.
Problems in China’s real estate sector have also shaken foreign investors. The Financial Times, based on information from Dealogic, estimated last autumn that the outstanding amount of foreign bonds of Chinese developers was nearly $60 billion, while syndicated loans amounted to about $40 billion. Foreign bonds of Kaisa Group Holdings alone amount to about $2.5 billion, and in the case of a bankruptcy the position of foreign creditors seems to be weak.