Cash-starved property developers in China are facing the heat from homebuyers, who have threatened to halt mortgage payments on hundreds of unfinished property projects. The property developers, who have consistently relied on pre-sales of apartments, are now facing a shakedown in the market.
The unrest in the sector has been spurred by delayed projects from private sector developers, many of whom are short of funds and now face an uncertain future.
In recent days, homebuyers have threatened to boycott mortgage payments, and many have taken their business to well-funded state-owned developers. Other homebuyers are also insisting on only purchasing completed apartments from developers.
The dramatic shift in the mindset of homebuyers in China is all set to reshape the property sector in the country, and analysts and observers feel that many private companies who earlier depended on pre-sales of apartments, may not survive the sudden transition.
Senior China economist at ANZ, Betty Wang, stated that the situation reflected a vicious cycle wherein if homeowners stopped mortgage repayments, recovery of the property sector would be affected.
She also mentioned that buyers of unfinished projects are put off by construction delays in addition to falling home values in a softening market.
Uncertain financial prospects in a slowing economy, job fears, and environmental issues have also precipitated the agitation to boycott mortgages.
The property sector in China accounts for almost a quarter of the country’s economic output, and the agitation comes at a sensitive time when the property market had shown signs of stabilisation in June.
Over the last one year, the property market in China has faced a series of crises, including rising liabilities, reduced demand and a slow economy. The sector has also witnessed a lack of fresh fundraising sources.
A number of private developers in the country have defaulted on offshore debt commitments, and are struggling to raise funds from banks and other sources.
An executive at a private property developer stated that the sector is facing a domino effect. He said that if homebuyers do not purchase pre-sale apartments, the developers would not be able to raise the funds to complete the projects. He also said that after repaying loans, the developers were left with little or no money to repay onshore and offshore bonds.
China Project Delays
Some analysts have estimated that unfinished projects constitute between 5 and 20 percent of the projects across the country.
Analysts from ANZ estimate that apartments at risk of being unfinished represent almost USD222 billion worth of mortgages, a massive 4 percent of total outstanding mortgages.
China’s banking regulator has sought to reassure homebuyers that pre-sold projects would be delivered on time, and encouraged lenders to support real estate projects with the required funds.
Developers owned by the state have also taken over projects from heavily indebted private companies, with more takeovers expected in the days to come.
The mortgage boycott protests have reached an unprecedented level, affecting more than 200 projects by over 80 developers across the entire country.
Homeowners in China, who previously favoured new properties under construction, are now wary of unfinished projects in light of the Evergrande Group’s plunge into a debt crisis in the previous one year.
Homebuyers are also leaning towards more financially secure, state-owned developers.
In a recent report, Moody’s stated that the boycott would accelerate the shakedown of struggling property developers. It further mentioned that the rise in mortgage defaults will further financially differentiate strong developers from weaker peers.