China Evergrande’s financial woes are being felt in the property developer’s backyard as sales agents and homebuyers confront uncertainties in a sector that has been one of the most important drivers of economic growth.
Real estate agents in the southeastern Chinese city of Shenzhen say they have seen a marked slowdown in recent weeks as Evergrande’s failure to meet debt obligations has made headlines, and government restrictions to cool the market continue to bite. The weak market sentiment extended to the larger Guangdong Province that is home to the other members of China’s big three developers, Country Garden and Vanke.
There weren’t any customers on a recent visit to an office of Leyoujia, one of the biggest property agents in Shenzhen, in the Longhua district last week. The office was surrounded by both completed residential towers and some under construction.
“Customer enquiries have been quieter compared to the same period last year, probably due to the Evergrande issue and other negative reports about the property market,” said a sales staff member.
“Homebuyers are probably adopting a wait-and-see attitude as the government appears to be intervening to maintain market stability.”
The trajectory of China’s housing market has become a focus of global attention as Evergrande, the world’s most indebted property developer, has failed to pay bond coupons to international investors, invoices from contractors and repayment demands from wealth management customers. Beijing has flooded cash into the banking system to cut the risk of contagion while Evergrande works to resolve its $300 billion in liabilities. But a decline in the value of the underlying property market could trigger much broader problems across the financial system.
Another Shenzhen developer, Fantasia, this week said it too had missed a bond repayment.
Even before the defaults, the local market had been affected by a series of measures to rein in rising housing prices in Shenzhen, known also for the concentration of technology companies including Huawei and Tencent. Those measures include a sales price limit on residential houses introduced by local authorities to cool speculative activity.
Taking a cue from President Xi Jinping, who has repeatedly said homes are for living in and not for speculation, authorities also demand that only Shenzhen locals with residency permits and who have made social security contributions for three years are allowed to buy homes there.
Guangdong’s real estate investment has dropped sharply since a roaring start to the year. The figures — a combination of construction spending and residential and commercial sales — show that investment was running 37% higher than the previous year in January and February, but the cumulative total for the January-August period was up only 7.8%, implying a contraction in more recent months and coming in below the national average.
Indications are September was even worse as Evergrande’s crisis unfolded. Analysts at CCB International, citing national data from China Real Estate Information Corporation on contracted sales by the biggest developers, said it was “possibly the worst September sales in 20 years.” National sales by Vanke and Country Garden were down by about a third year-on-year last month, they said.
In Shenzhen, a straw poll of agents downtown suggested the price of homes in new developments has fallen between 5% and 10% in recent months, but they predicted the tapering in demand will be short-term.
“Home prices are super low now, compared to last year, thanks to the government measures,” said a salesperson at an office of Lianjia, China’s largest real estate broker. “In fact, we have seen buying interest coming back these few days after statements made by Evergrande to assure the market.”
But if agents are bullish, buyers have mixed views.
“Ten percent cheaper is still beyond my reach,” said Shi Yong, an accountant in Shenzhen who has given up hope of owning an apartment.
Some property investors like Rebecca Hu worry that the government price curbs will dent the value of her new apartment in Zhongshan, a city about 100 km west of Shenzhen. Hu and her four colleagues working in a five-star hotel in Shenzhen chipped in their savings and invested this year in a waterfront apartment worth 2.4 million yuan ($372,000).
“The salesperson said the value would double in three years’ time and our intention was to flip it for a profit,” said Hu.
Her apartment on Zhongshan’s Ma’an Island is linked to Qianhai by a 24 km bridge under construction. Qianhai is Shenzhen’s latest economic zone under Beijing’s Greater Bay Area to stimulate growth in Guangdong, Hong Kong and Macao.
The apartment’s developer, China’s Poly Group, is selling the project under the tagline, “Live in Ma’an, work in Qianhai,” attracting white-collar buyers like Hu from expensive Shenzhen. A similar unit in Shenzhen would cost more than double the price.
With the country’s post-pandemic recovery showing some strain — from falling retail sales to contracting manufacturing — and the Evergrande debacle ongoing, Hu was not convinced of a sustained increase in property prices.
“We may have to wait longer than initially expected to achieve our intended return on investment,” she said. “And that’s premised on the fact that we could still hold on to our existing job to service our mortgage.”
Tommy Wu, chief economist at Oxford Economics in Hong Kong, says China’s real estate outlook will be lackluster for the remainder of the year and next year, weighed down by the trouble at Evergrande.
“What’s more, the risk of a sharper slowdown in real estate activity can’t be ruled out, especially at a time when China’s economic momentum is slowing after last year’s strong recovery,” Wu wrote in a recent research note.
Some economists, including those at Citi Research, expect Evergrande to undergo a managed restructuring.
“Evergrande’s failure and the government’s reaction are evolving in real time,” Citi’s Hong Kong team led by Yu Xiangrong wrote. “Considerable uncertainty persists as to where the resolution falls in the spectrum between bailout and collapse.”
Whether it is through policy measures or direct intervention in Evergrande, Shenzhen’s real estate market players expect Beijing to continue to stabilize the market in the near term.
“There will be fluctuation in property prices but it will be not so big as to result in a bubble burst,” said the agent at Leyoujia. “After all, it is the homebuyer’s hard-earned saving and the government is unlikely to allow it to happen.”
The article was first published on Nikkei Asia.