2012-08-13

Wenzhou group home specualtors totally defeated, lost their life savings, have no choice but to run

As I said last week, news of a steel magnate hitting the road was just the beginning. Today there's a report about Wenzhou group home speculators fleeing their debts. See: 温州炒房团或全军覆没:血本无归 不得不跑路 (Wenzhou group homebuyers totally defeated, lost their life savings, have no choice but to run)

Wenzhou is the "center" of China's private economy (many private businesses are here and there's an entrepreneurial spirit among the people) and in recent years, they formed real estate investment groups. The media dubs this "group buying" since instead of investing in a fund, they negotiate with developers directly for deals on home purchases.

Wenzhou buyers were believed to be overheating markets as far-flung as Shanghai and Chengdu, and some laws restricting non-residents from buying homes were aimed in part at these "group buyers" who would soak up investment properties.

Their activities drove up prices on the way up and now they are helping them collapse on the way down. One property has seen prices come down 30-40%, leaving the buyers underwater and unable to repay debt. (As an aside, many real estate bulls like to point out that Chinese do not borrow to buy homes. However, they do tap the equity in their home to purchase investment properties or help a child buy a home.)

One investor (Zhang Ming)is quoted as saying, "To sell or no to sell? I am riding the tiger, if I sell my loss is enormous, if I don't sell I bleed incessantly." He has investor friends who had their holdings split up among creditors and they had no choice but to flee their remaining debts.

80% of home speculators cannot repay their debs

In 2010, Zhang Ming paid a¥5 million down payment on a ¥38 million, 14-story apartment building, costing about ¥80,000 per square meter. When it became clear that real estate restrictions would cool the market, he rushed to get his down payment back, but the developer refused. Here we see another risk: investors cannot repay their debts because their cash is locked into down payments.

Zhang refused to pay the rest of the bill and the developer took him to court, where the judge ruled he must pay ¥31 million for the building. He borrowed this money at 1-2% monthly interest from friends and family. Currently, he would be lucky to get ¥20 million for the building and even then, his total cost is about ¥40 million after interest costs.

The word on the street is that about 20% of Wenzhou speculators escaped the collapse, with another 80% trapped like Mr. Zhang.

According to a PBOC study last July, 20% of private loans were to real estate ventures. Real estate is estimated to have taken one-third of Wenzhou direct and indirect private market loans—and half of those loans and properties were used as collateral to finance other loans!

In 2010, 40 of Wenzhou's top 100 businesses, including footwear and apparel companies, were speculating in real estate.

The article concludes with the weak real estate market and a pessimistic view of the next 3 to 5 years for the industry in Wenzhou. The government real estate controls will prevent a re-inflation of the bubble, but also prevent a price collapse that could reinvigorate the sector.


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