China Property Market

The risk of lower downpayment is borne by developers. In other words, the developers are willing to sell with a 25% discount, to ease the cash flow, with an option to redeem without interest, if all go well.

The zero-interest loans by the developers, should be unsecured.

Developer's zero-interest loans highlight China property risks
18 Jul 2014 06:55
[HONG KONG] China's third largest property developer, Evergrande Real Estate, has joined smaller peers in offering zero-interest downpayment loans, a practice reminiscent of the US housing boom that precipitated the global financial crisis.

The easy credit shows the gamble Chinese developers are willing to take to keep sales on track, but also highlights the risk of a broader industry correction if buyers default. So far such defaults have been rare in China, where household debt is low by Western standards and banks have traditionally required hefty deposits from buyers seeking mortgages.

Many analysts believe the slowing property sector poses the biggest risk to China's economy in the second half of the year, despite a rebound in home sales in June as state-controlled banks offered more credit to support the market.

Guangzhou-based Evergrande, the country's No 3 developer by sales, is offering downpayment loans of nearly a quarter of the purchase price to home-buyers for some of its projects.

Such loans skirt government rules that require a minimum deposit of 30 per cent of a home price, while buyers who have put down as little as 6 per cent upfront would find it easier to bail if the market turns. "Buyers who can't provide the 30 per cent downpayment are generally low quality," said Midland Realty chief operating officer Samuel Wong.
...
Source: Business Times Breaking News

The biggest glaring difference between China and the west is that most of the houses are bought for 50% LTV. Most are skeptical until they realise that there are effectively 3 couples buying a house because of the 1 child policy.

But speculation is definitely there as Wenzhou has shown. As Wen JiaBao put it aptly, a small problem multiplied by 1 billion is a big problem. From Trust loans to now zero interest deposit loans, basically Evergrande has shown us what a "quality" developer it is. No management meeting needed.

Some states in the US can't bankrupt the person if they turn in the keys for mortgages they can't pay. I wonder what is Chinese bankruptcy law on this?

(18-07-2014, 10:35 AM)specuvestor Wrote: The biggest glaring difference between China and the west is that most of the houses are bought for 50% LTV. Most are skeptical until they realise that there are effectively 3 couples buying a house because of the 1 child policy.

But speculation is definitely there as Wenzhou has shown. As Wen JiaBao put it aptly, a small problem multiplied by 1 billion is a big problem. From Trust loans to now zero interest deposit loans, basically Evergrande has shown us what a "quality" developer it is. No management meeting needed.

Some states in the US can't bankrupt the person if they turn in the keys for mortgages they can't pay. I wonder what is Chinese bankruptcy law on this?

We need to differentiate the banks' mortgage loan and the developers' loan in this case. Mortgage loan LTV remains the same, while the developers sold the property with 25% less from listed price, with a name of a unsecured down-payment loans.

Personal bankruptcy is rare in China, IIRC, but I admit that I know little on the topic. May be a good research topic

Yeah of course they are different... hope I didn't sound otherwise Yet they are related. If the developers are hit by the zero interest deposit loan default, the banks and trusts lending them loans will be pressured as well. 1/2 of the trust loans are property related. They are circumventing the intent of the 30% deposit rules which ironically is to protect them. (hmmm... sounds familiar)

IIRC Singapore developers/ real estate agents tried doing that as well but MAS put a stop to it.

(18-07-2014, 11:11 AM)specuvestor Wrote: Yeah of course they are different... hope I didn't sound otherwise Yet they are related. If the developers are hit by the zero interest deposit loan default, the banks and trusts lending them loans will be pressured as well

IIRC Singapore tried doing that as well but MAS put a stop to it.

Yes, you are right. Singapore version is the deferred payment scheme (DPS), which is quite similar as the China developers are doing.

It might be a better option for the developers, which reduces the probability of default, with increased inflow of cash, instead of remains as inventories.

Nope not the DPS... it was more blatant than that

Firesale solves short term cashflow problem, but fundamentally it decreases the quality of the cashflow and profits that the bank loans were originally lent against. Yet it is still better that you cut prices than to do a loan.

In short, leverage cuts both ways. By lending to the buyer, you are increasing credit risk in exchange for better looking books.

[第一时间]大连：部分楼盘价格腰斩 购房者仍观望
http://jingji.cntv.cn/2014/07/18/VIDE140...2192.shtml


20140713 杨澜访谈录 中国楼市十年冷暖
http://www.youtube.com/watch?v=TwCtxW28-W0

The fellow in the video pretty optimistic saying no more spectacular growth but property wont tank.

IF you look at overbuilding with easy credit in the European PIGS countries and then at USA in 2008, it just looks like a repeat of history to me. Heaps of empty apartments and shopping centers with values not supported by rental or any sort of commercial activity are very good "on the ground" indicators of a bubble.

Its just a matter of when the crash happens and not if it happens I reckon.

(15-07-2014, 09:34 AM)heifien91 Wrote: Haha I'm really looking long term like 10-15 years later I guess..hopefully by then China would be totally open without all the restrictions and better control on accounting frauds =/

It's going to take time but I would say that China is heading down the right path. Related party transactions have dropped, and you see more people trying to build up truly global companies.

One example is Foshan, which is trying to emulate Berkshire Hathaway.

However, I have serious doubts on whether this is achievable in the long run without a change in the system. The legal system is perhaps the biggest problem. While we are used to a rule "of" law, China is currently ruled "by" law... and widespread corruption is a major problem that is hard to deal with.

Regards,
theasiareport.com

A very good report by CBRE, IMO.

The FULL REPORT is better.

Interesting to note China already has a platform in place to clean up NPLs if more defaults emerge..........................................
________________________________________________________________________________________________________________
China Shadow Banking: More Defaults Likely but Limited Impact for Real Estate Sector

Window of Opportunity to Enhance Return, Improve Investment Terms

By CBRE

Hong Kong, June 13, 2014

Since the beginning of 2014 there have been a number of loan defaults in China, including those in the real estate sector. These high-profile defaults have put the spotlight on the distressed situation facing many developers in lower tier cities where market conditions are deteriorating. CBRE’s latest research report China Shadow Banking and the Real Estate Market looks at the role of shadow banking in real estate defaults and assesses the broader impact on the real estate sector and investment market.

Over the past several years, Chinese developers have increasingly turned to the shadow banking market as a source of funding. The three traditional sources of funding for developers—bank loans, equity issuance in the public markets, and proceeds from pre-sales of new properties—have all been hit to various degrees. As the central government began increasing its efforts to cool down the residential sector in 2010, domestic capital markets essentially shut down for Chinese developers while domestic banks turned more cautious towards the sector due to their exposure and fear of increasing default risks. Most listed developers still have access to bank loans and capital markets, but bank financing has become very difficult to obtain for small- to medium-sized developers. Consequently, proceeds from pre-sales became the major source of funding for smaller developers where recently sales volumes have been hit heavily by the government’s cooling measures.

More Defaults Likely but Risks Limited to Small-, Medium-sized Developers

Economic growth in China has continued to weaken in 2014 and is placing additional strain on the already stagnant residential real estate market. Small- to medium-sized local developers in lower tier cities—which have largely been reliant on the pre-sale financing model—will be more exposed to risks arising from the slowdown in pre-sales and availability of working capital

Concern over the rapid growth of the shadow banking sector in China is also expected to result in credit tightening of shadow financing channels. As a result, more defaults in the China property sector are to be expected. However, CBRE believes that this will only be within the tolerance level of the central government, as authorities want to ensure lenders are more vigilant towards controlling the quality and volume of their lending ....................................................

Furthermore, the government has established four distressed asset management companies to receive non-performing loans (NPLs) in the wake of the 1999 GITIC default—the biggest in Chinese history. China therefore already has a platform in place to clean up NPLs if more defaults emerge..........................................

Opportunity for Investors

Despite the short-term uncertainty over the resolution of the over-expansion of the lending market and problematic lending, the long-term outlook for economic growth in China remains largely positive. The current situation presents a window of opportunity for investors to negotiate lower prices and yield-enhancing investment terms on projects in upper-tier cities where the demand-supply situation is more balanced.

“For investment funds and equity investors, now is the opportune time to begin searching for attractive deals in the residential market, since many developers are struggling to obtain financing. However, their focus should be on tier one markets where demand remains robust and land supply is more balanced,” said Mr. Nick Crockett, Executive Director, CBRE, Capital Advisors, Asia Pacific................

http://www.cbre.com.hk/EN/aboutus/mediac...ector.aspx

FULL REPORT
https://www.summitas.com/system/files/se...6%2012.pdf