China Real Estate
Chinese Homebuyers’ Mortgage Boycott Roils Property Developer High-Yield Notes; Banks’ Exposure Seen Manageable; Regulators Focus on Timely Delivery of Housing, Remind Banks of ‘Social Responsibility’
Tue 07/19/2022 20:00 PM
In early July, reports began surfacing in China about homebuyers protesting in streets and boycotting mortgages on unfinished apartment buildings. On July 12, such reports started circulating offshore, prompting bonds issued by real estate companies to drop. Several developers saw declines of five to 10 points across the curve on their USD notes. The $1.35 billion 7.25% due 2026 notes issued by Country Garden, for instance, were indicated around 30 at close on Tuesday, July 19, down 20 points from 50 on July 11. Companies that are widely perceived to be stronger were not immune to the selloff. China Vanke’s $1 billion 3.975% due 2027 notes were indicated around 80 on July 19, down from 88 on July 11.
Read more on the Chinese mortgage boycott:
Buyside and sellside sources who spoke to Reorg pointed to the potential impact on the homebuyers’ credit ratings, sales performance of property developers and banks’ asset quality which if not contained, could result in further deterioration of asset value. Chinese banking regulators’ reaction so far has focused on ensuring the timely delivery of apartments and instructing banks to continue lending to developers.
The scope of projects and loan amount involved in the mortgage defaults is hard to verify as the Chinese government has cracked down on the sharing of such information. Unofficial estates put the number of affected cities at more than 80 and real estate projects at hundreds as of Monday, July 18.
A report Monday from the E-House Research Institute Think Tank Center researched 271 statements issued by homebuyers about suspending their mortgage payments if construction on their projects does not resume. Some statements dated as far back as April 2021, suggesting that the practice began way earlier than the most recent wave of homebuyer defaults. It was not until a June 30 statement in Jiangxi province piqued wider public interest that the number of such notices surged across the country.
The homebuyer statements involve 200 development projects in such provinces as Henan, Hunan, Hubei, Shaanxi and Hebei that are owned by 87 real estate companies, the report shows. About 46% of the projects were first pre-sold to homebuyers in 2019 and are due for delivery in 2022. The average amount of time that the projects have remained suspended is 16 months, according to the report.
Impact on Property Market
Investors and analysts alike said they worry that if unchecked, the mortgage defaults may create a negative feedback loop, resulting in the worsening of both the financing environment and sales of Chinese real estate developers. Mortgage defaults and unfinished construction will lead to banks reducing lending and increasing financing costs for both mortgage and development loans.
Mortgage payments for pre-sold projects typically begin at the time of purchase, rather than when construction is completed, Fitch Ratings said in a release on Monday. Fitch said its base case assumes that China’s property sales will stabilize in the second half of 2022, based on its current expectation of a 25-30% decline in 2022 sales, followed by low single digit growth in 2023. “A delay in the recovery of sales would further damage the performance of property-developer loans and, potentially, residential mortgage loans,” Fitch said in the release, adding that asset risks for bank loans that are collateralised by residential properties, such as micro and small enterprise loans, could also increase.
The mortgage boycotts highlight the importance of tight regulatory oversight of escrow accounts, and Fitch said it does not expect local governments to provide liquidity relief to property developers by relaxing control over the use of such funds. As such, the funding environment is likely to remain tight for developers until property sales show a sufficient and consistent recovery, Fitch said, and such recovery may be stalled as more homebuyers are reluctant to pay before apartments are delivered.
Bank Exposure
As of July 14, 17 Chinese banks had issued statements, reporting a total of RMB 3.7 billion mortgage loans associated with uncompleted projects. They said their exposure is relatively small and manageable, according to a report from Yicai, a Chinese financial news outlet, citing among other sources, the banks’ public disclosure.
Among the state-owned banks, Agricultural Bank of China reported the highest amount of total overdue mortgage loans, of RMB 660 million, and Bank of China and China Construction Bank had not disclosed their exposure yet, the report shows.
Among joint-stock banks, Industrial Bank Co. reported RMB 384 million affected mortgage loans, Zheshang Bank RMB 31 million, and Ping An Bank RMB 31.8 million, according to the Yicai report.
In its Monday release, Fitch detailed the percentages of residential mortgages of total loans by bank, as follows:
Fitch said it does not believe the defaults will directly affect Fitch-rated Chinese banks, with most disclosing that affected mortgage loans amount to less than 0.01% of their outstanding residential mortgage loans.
Banks’ ‘Social Responsibility’
During an interview with the official China Banking and Insurance News, representatives of the China Banking and Insurance Regulatory Commission said the commission has attached great importance to the issue and will coordinate with other regulators including the Ministry of Housing and Urban-Rural Development and the central bank to ensure timely delivery of projects in order to protect people’s welfare and social stability, according to the report. The commission will uphold the principle of “housing is for living, not for speculation” to maintain the stability of land and housing prices.
“Banks and insurance companies should actively participate in relevant work mechanisms and cooperate and solidify responsibilities of enterprises and shareholders,” the representatives were quoted as saying. “Banks should actively perform their own responsibilities. They should not only observe the principles of market orientation and rule by law, but they should also voluntarily shoulder social responsibility and use all means possible to ensure timely delivery of projects.”
The commission said that banks and insurance companies should meet real estate companies’ “reasonable” financing needs and support the construction of rental houses and project M&A. Current challenges may well provide an opportunity for the industry to transform itself, the representatives were quoted as saying.
On the local level, the city of Xi’an in the northwestern province of Shaanxi was among the first to issue rules aimed at preventing the increase of unfinished projects.
The Xi’an Housing and Urban-Rural Development Bureau issued a joint notice dated July 14 with other local regulatory bureaus, stipulating rules regarding land parcel transfer, pre-sale permit issuance and supervision of pre-sale fund escrow accounts. For instance, developers are required to use their own funds only for buying land parcels and are not allowed to use loans from shareholders, banks or other third parties, the notice shows.
There has been debate among regulators, however, according to onshore reports, with proponents of a mortgage payment holiday suggesting homebuyers receive a reprieve until their apartments have been delivered. Some have suggested local governments provide funding support to real estate developers using proceeds from land sales, and others have advocated banks providing loans to developers.
Other potential solutions involve equity interests in the underlying projects, according to a commentary from onshore brokerage Tianfeng Securities. For instance, such interests can be transferred to construction companies that are joint venture partners. Project assets can be pledged with local government-backed vehicles, which will hold the assets temporarily and share supervision responsibility of the pre-sale escrow accounts.
For projects that do not have enough salable resources or have had funds misappropriated, potential solutions include revitalizing outstanding salable resources and collecting misappropriated funds. Appropriate relaxation of limitations on sales and purchases should also be considered to accelerate inventory sales and alleviate developers’ debt pressure, according to the commentary.
- Katherine Shi, Anna Zhang, Sherry Li, Vanessa Gu
Read more on the Chinese mortgage boycott:
Buyside and sellside sources who spoke to Reorg pointed to the potential impact on the homebuyers’ credit ratings, sales performance of property developers and banks’ asset quality which if not contained, could result in further deterioration of asset value. Chinese banking regulators’ reaction so far has focused on ensuring the timely delivery of apartments and instructing banks to continue lending to developers.
The scope of projects and loan amount involved in the mortgage defaults is hard to verify as the Chinese government has cracked down on the sharing of such information. Unofficial estates put the number of affected cities at more than 80 and real estate projects at hundreds as of Monday, July 18.
A report Monday from the E-House Research Institute Think Tank Center researched 271 statements issued by homebuyers about suspending their mortgage payments if construction on their projects does not resume. Some statements dated as far back as April 2021, suggesting that the practice began way earlier than the most recent wave of homebuyer defaults. It was not until a June 30 statement in Jiangxi province piqued wider public interest that the number of such notices surged across the country.
The homebuyer statements involve 200 development projects in such provinces as Henan, Hunan, Hubei, Shaanxi and Hebei that are owned by 87 real estate companies, the report shows. About 46% of the projects were first pre-sold to homebuyers in 2019 and are due for delivery in 2022. The average amount of time that the projects have remained suspended is 16 months, according to the report.
Impact on Property Market
Investors and analysts alike said they worry that if unchecked, the mortgage defaults may create a negative feedback loop, resulting in the worsening of both the financing environment and sales of Chinese real estate developers. Mortgage defaults and unfinished construction will lead to banks reducing lending and increasing financing costs for both mortgage and development loans.
Mortgage payments for pre-sold projects typically begin at the time of purchase, rather than when construction is completed, Fitch Ratings said in a release on Monday. Fitch said its base case assumes that China’s property sales will stabilize in the second half of 2022, based on its current expectation of a 25-30% decline in 2022 sales, followed by low single digit growth in 2023. “A delay in the recovery of sales would further damage the performance of property-developer loans and, potentially, residential mortgage loans,” Fitch said in the release, adding that asset risks for bank loans that are collateralised by residential properties, such as micro and small enterprise loans, could also increase.
The mortgage boycotts highlight the importance of tight regulatory oversight of escrow accounts, and Fitch said it does not expect local governments to provide liquidity relief to property developers by relaxing control over the use of such funds. As such, the funding environment is likely to remain tight for developers until property sales show a sufficient and consistent recovery, Fitch said, and such recovery may be stalled as more homebuyers are reluctant to pay before apartments are delivered.
Bank Exposure
As of July 14, 17 Chinese banks had issued statements, reporting a total of RMB 3.7 billion mortgage loans associated with uncompleted projects. They said their exposure is relatively small and manageable, according to a report from Yicai, a Chinese financial news outlet, citing among other sources, the banks’ public disclosure.
Among the state-owned banks, Agricultural Bank of China reported the highest amount of total overdue mortgage loans, of RMB 660 million, and Bank of China and China Construction Bank had not disclosed their exposure yet, the report shows.
Among joint-stock banks, Industrial Bank Co. reported RMB 384 million affected mortgage loans, Zheshang Bank RMB 31 million, and Ping An Bank RMB 31.8 million, according to the Yicai report.
In its Monday release, Fitch detailed the percentages of residential mortgages of total loans by bank, as follows:
Fitch said it does not believe the defaults will directly affect Fitch-rated Chinese banks, with most disclosing that affected mortgage loans amount to less than 0.01% of their outstanding residential mortgage loans.
Banks’ ‘Social Responsibility’
During an interview with the official China Banking and Insurance News, representatives of the China Banking and Insurance Regulatory Commission said the commission has attached great importance to the issue and will coordinate with other regulators including the Ministry of Housing and Urban-Rural Development and the central bank to ensure timely delivery of projects in order to protect people’s welfare and social stability, according to the report. The commission will uphold the principle of “housing is for living, not for speculation” to maintain the stability of land and housing prices.
“Banks and insurance companies should actively participate in relevant work mechanisms and cooperate and solidify responsibilities of enterprises and shareholders,” the representatives were quoted as saying. “Banks should actively perform their own responsibilities. They should not only observe the principles of market orientation and rule by law, but they should also voluntarily shoulder social responsibility and use all means possible to ensure timely delivery of projects.”
The commission said that banks and insurance companies should meet real estate companies’ “reasonable” financing needs and support the construction of rental houses and project M&A. Current challenges may well provide an opportunity for the industry to transform itself, the representatives were quoted as saying.
On the local level, the city of Xi’an in the northwestern province of Shaanxi was among the first to issue rules aimed at preventing the increase of unfinished projects.
The Xi’an Housing and Urban-Rural Development Bureau issued a joint notice dated July 14 with other local regulatory bureaus, stipulating rules regarding land parcel transfer, pre-sale permit issuance and supervision of pre-sale fund escrow accounts. For instance, developers are required to use their own funds only for buying land parcels and are not allowed to use loans from shareholders, banks or other third parties, the notice shows.
There has been debate among regulators, however, according to onshore reports, with proponents of a mortgage payment holiday suggesting homebuyers receive a reprieve until their apartments have been delivered. Some have suggested local governments provide funding support to real estate developers using proceeds from land sales, and others have advocated banks providing loans to developers.
Other potential solutions involve equity interests in the underlying projects, according to a commentary from onshore brokerage Tianfeng Securities. For instance, such interests can be transferred to construction companies that are joint venture partners. Project assets can be pledged with local government-backed vehicles, which will hold the assets temporarily and share supervision responsibility of the pre-sale escrow accounts.
For projects that do not have enough salable resources or have had funds misappropriated, potential solutions include revitalizing outstanding salable resources and collecting misappropriated funds. Appropriate relaxation of limitations on sales and purchases should also be considered to accelerate inventory sales and alleviate developers’ debt pressure, according to the commentary.
- Katherine Shi, Anna Zhang, Sherry Li, Vanessa Gu
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