Land Hoarding and Leverage Behind China’s Real Estate Debt Crisis: Peak Industry Body

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A report from the peak body for China’s real estate sector highlights extremely high leverage levels and the mass accumulation of land as a key factor behind the current debt woes of some of the country’s biggest property developers.

The report from the China Real Estate Association (CREA) imputes the debt woes of Chinese property developers to excessive leverage amassed by the largest amongst them, as well as a rush to amass land for future development.

“Following gains in housing prices and the introduction of low interest rate tools, real estate enterprises became greedy, driving them towards higher leverage,” said the report.

“The source of funds for real estate development projects only required a small amount of self-owned funds – for example 10%, with the remainder all consisting of debt.

“Real estate enterprises continually borrowed money, grabbed land, then borrowed again, forming a huge pool of funds. On the liabilities side were bank loans, customer pre-payments and bonds, and on the asset side were huge amounts of land.

“At this point, real estate enterprises seemed more like speculators in land than development companies.”

Defaults on real estate bonds in China surged last year, amidst uncertainty in both the global economy and the domestic property sector. Data from the Beike Research Institute (贝壳研究院) indicates that by November last year 2021 had seen 67 defaults on real estate bonds, for an increase of 131% compared to the same period the year previously.

Out of 69 A-share real estate enterprises in China that have released their 2021 performance results, 29 of them reported losses, accounting for 42% of the total. 14 companies these companies also reported losses in excess of 1 billion yuan.

Figures from Chinese financial data provider Wind further indicate that the period from 2022 to 2025 is set to be a peak period for repayments of US dollar bonds by Chinese real estate enterprises.