China’s real estate market: Fear of a chain reaction is growing

Status: 05.10.2021 1:17 p.m.

The crisis in Chinese real estate companies is spreading. Now there is another cause for concern: Fantasia Holdings Group was unable to service an outstanding bond yesterday.

On Monday, the Chinese real estate developer Fantasia would have had to repay a bond of more than $ 200 million. But as it said in a statement on the Hong Kong Stock Exchange, the company did not make the payment. In addition, property manager Country Garden Services said Fantasia has failed to repay a loan of over $ 100 million that was also due yesterday.

Fantasia and Sinic credit ratings downgraded

The rating agency Fitch then lowered Fantasia’s credit rating by several levels from “B” to “CCC”. The agency warned that due to the uncertain financial position, there is a significant risk that the company will not be able to make upcoming payments on its bonds.

The Fantasia Group is not the only company in the Chinese real estate industry to make headlines: The rating agencies Fitch and S&P Global also downgraded the creditworthiness of the real estate developer Sinic and warned of payment defaults. Sinic is in a serious liquidity crisis and the ability to service debts is almost exhausted, the experts from S&P justified the decision. In mid-October, the real estate developer has to pay bond interest of around $ 250 million.

Fantasia and Sinic have a smaller market share than the fluctuating giant Evergrande: According to the financial information service Bloomberg, Fantasia is only listed 60th in the top 200 Chinese real estate companies in the first quarter of this year and has debts of around 13 billion dollars to settle. And investors had already expected difficulties for the property developer, because last month the company was one of the losers in the Bloomberg index for Chinese junk bonds. Citigroup and Credit Suisse Group have not accepted any bonds from Fantasia as collateral since September.

“A vicious circle for real estate developers”

Nevertheless, the payment difficulties are fueling concerns that the turbulence in the Chinese real estate market could worsen. Because Fantasia suffers from similar difficulties as Evergrande and other large real estate groups – the entire industry is partly financed by high-yield bonds.

In contrast, the leadership in Beijing had issued new restrictions that, among other things, make borrowing and property purchases more difficult. The aim of the “three red lines” is to take action against speculation on the housing market. For this reason, many real estate companies in China are currently not getting any loans for refinancing, and the possibility of generating capital through property sales has also decreased significantly recently. “It’s a vicious circle for real estate developers who are not strong enough because there is not enough liquidity in the market for everyone,” warned Thomas Kwok, chief securities officer at brokerage firm Chief Securities.

Bankruptcies could trigger a domino effect

Investors now fear that the crisis could spread to other sectors of the Chinese economy and spread beyond them. Investor George Soros warned in the “Financial Times” that the real estate industry is the “most vulnerable” sector in China. The circumstances “could trigger a crash”.

Asian analysts have long been warning that Evergrande’s bankruptcy could trigger a domino effect on the stock market. The heavily indebted real estate company urgently needs capital; Trading in its shares on the Hong Kong Stock Exchange was suspended yesterday.

Evergrande tries to get some air out of its liquidity crisis by selling parts of the company. According to a report by the state newspaper “Global Times”, Evergrande plans to sell 51 percent of its subsidiary Property Services Group to rival Hopson for five billion dollars. The official confirmation of the deal is still pending. The Chinese government has not yet commented on the real estate developer’s difficulties. Experts speculate that the government in Beijing could order a breakup.

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