A new report claims that the value of the real estate assets held by China’s listed banks could be as much as 7 trillion yuan (approx. USD$1.02 trillion), much of which is unreflected by official accounts.
Mid-year financial reports indicate that as of the end of the first half of 2018 the self-owned “real estate-related fixed assets” (including houses, and buildings, projects under construction and houses undergoing refurbishment) (“涉房固定资产”(含房屋及建筑物、在建工程以及房屋装修)) of 26 listed Chinese banks had a net value of 622.7 billion yuan, as compared to an original value of nearly 900 billion yuan, according to a report from Securities Daily .
The report claims, however that “conservative estimates” would put the actual market value of these assets as high as 4.5 trillion yuan, or nearly 4 trillion yuan higher than the value reflected by official financial statements.
Securities Daily further claims that if the off-balance sheet real estate assets of China’s listed banks are included, their total housing-related fixed assets could run to as high as 7 trillion yuan.
The report points out that many listed banks employ an accumulated depreciation ratio of more than 30%, with some lenders using a figure of over 50%, leading to severe underestimation of their real estate assets.
The vast majority of banks use costs as the initial value for real estate-related fixed assets, and employ an annual depreciation rate of between 2 – 7%, with 4% being more common.
This divergence between book values and market values is further compounded by the roaring growth of Chinese real estate prices since purchases were made, particularly in the CBD’s and financial districts where banks are more likely to buy property.
“The banks all own real estate in golden areas,” said Shi Yuzhu (史玉柱) in a Weibo post from several years ago. “The volume is large enough to shock people.
“All of it is entered into accounts based on costs in the year of construction or purchase, which is often costs from 10, 20 or 30 years ago…this amount is very low.
“If re-appraisal is made in accordance with international standards, then based on fair value measurements there would be a large-scale increase in bank capital, and they would have no need to ask for more money from shareholders for several years.”
China’s listed banks saw the biggest acceleration in their purchase of fixed assets in 2008 and 2009, just as the Global Financial Crisis led to a decline in domestic real estate prices.
Consequently Securities Daily estimates that the average change in the fair value of real-estate related fixed assets held by listed banks to be at least a five-fold increase compared to the original cost, or even as high as an eight-fold rise.
“Actually, when we first purchased real estate there was some hesitation, but given that the bank needed an office site that matched its brand, and good positions on Financial Street are limited, we decided to buy this commercial property,” said one head of a Beijing-based listed bank.
“At the time we didn’t think that several years afterwards we would look back to see that the real estate value had posted a several-fold increase. However, because the real estate its for self-usage, we do not feel that the rise in real estate value has had a substantive impact on the bank.”