Debt Ridden Developers Crush Local Real Estate Markets; First Time Home Buyer Discount is "Extinct" In Many Cities

A developer in Ningbo went bust this week. Here's a refresher from the NYTimes:
China’s Rapid Growth Hits the Brakes
As the property market comes under pressure, real estate developers are feeling the pinch, especially those with huge debt.

Xingrun, a small developer in the coastal city of Ningbo, was unable to repay more than 3.5 billion renminbi ($566 million) in debt, according to reports in Chinese state-run news media on Tuesday. While it is not unheard-of for Chinese property developers to default on loans or to face bankruptcy, the size of Xingrun’s debt load is particularly notable.

The failure of the developer also comes two weeks after China’s 8.5 trillion renminbi domestic bond market experienced its first default in recent history. The Shanghai Chaori Solar Energy Science and Technology Company, a maker of solar cells and panels, defaulted after not making an annual interest payment of 89.8 million renminbi on a bond of one billion renminbi.

Beijing indicated last week that more defaults were inevitable, although the government would aim to contain the damage.

Xingrun had been in financial difficulty for months after having accumulated debt that included bank loans from 19 institutions. China Construction Bank, Shanghai Pudong Development Bank and Agricultural Bank of China were the company’s biggest creditors, according to multiple reports in Chinese news media.

“Xingrun is not the first developer to default, and for sure it won’t be the last,” said Bei Fu, a director of corporate ratings at Standard & Poor’s who focuses on the real estate sector. “We expect to see a wave of such small developers running into problems this year, both from a financing and operational perspective.”

Law enforcement officials in the city of Fenghua, which is part of Ningbo, have detained Xingrun’s legal representative and its controlling shareholder, a father and son, on suspicion of illegal fund-raising activities, the state-run China News Service reported on its website on Friday. In addition to the bank loans and other debt, local officials found the developer had tapped China’s ubiquitous, but illegal, informal lending networks, raising about 700 million renminbi from 98 individuals, according to the report.

This story is becoming more and more salacious. This article goes into detail: 浙崩盘房企35亿债务涉19家银行 关联公司高管“自杀”. Apparently there is now a "suicide" last December by a high level executive in the mix. I'm not going to post the Google Translation because the story is long and the translation isn't very clear. No doubt there will be some English coverage in the coming days or weeks.

Back to the real estate market. In 2011, the real estate busts were going on in cities such as Wenzhou and Hangzhou, with price cuts seen in Shanghai and other major cities. Due to the size of these markets, the price cuts amounted to a ripple in a lake.

In the ensuing years, the government chased some of the speculation into third and fourth tier cities. Large developers are a far larger share of the total market in these cities and some markets are saturated. In the case of Fenghua, a city of 500,000, the Xingrun bankruptcy is having an outsized effect, where home prices are already down 20% from their peak. Land prices are coming down as well, which will hit government revenue.

In Zhengzhou, a major rail hub in Henan (so by no means a small city), one developer is selling a property for nearly 50% below the price it would need to sell at just to preserve it's capital.

地价急跌困死开发商 四线城市房企资金链断裂负债累累 (Land prices plunge trapping developers, Fourth-tier cities real estate capital chain busted, debt ridden)
[ Abstract ] four-tier cities housing prices breach of samples: land prices plummeted starve developers.

A county-level city debt default housing prices, affecting the government, banks, corporations, the media and public sensibilities.

Verification by the local government, the current Zhejiang 江兴润 Property Investment Limited (hereinafter referred to as "Xing Yun Real Estate") and related businesses more than 3.5 billion yuan of total liabilities, including bank loans of 2.4 billion yuan, involving more than 10 banks, including China Construction Bank as the main borrowers. Fenghua, Zhejiang Province, the city government believes Hing Sheen and related business management confusion, resulting in capital chain rupture, preliminary verification has been insolvent.

Meanwhile, Xing Sheen illegal deposits from the public more than 700 million yuan, involving 98 people, including seven personnel at institutions. Currently, the task force and emergency leading group established in Fenghua has repeatedly communicating with the bank, hoping to properly resolve this issue.

Yesterday, even the foreign media reported that the central bank has intervened and held an emergency meeting with the China Construction Bank and Fenghua city officials to discuss how Xing Sheen 3.5 billion yuan of debt repayment problems.

In this regard, Fenghua Municipal Propaganda Department, Fenghua City Finance Office of the person responsible for the " First Financial Daily "reporters that knowledge. Central bank also reported yesterday publicly clarify with the facts, and strongly condemns the media.

According to the reporter, although Hing home run with some of the main events of default "problem properties" related, but many academics have told reporters that the event regardless of the real estate company or the banking industry, are likely to form a chain reaction, meaning risk warning very strong.

Two "problem properties"

Xing Yun home is larger Fenghua local real estate company, with 30 billion of assets, has been ranked first 33 hundred enterprises in Ningbo, five former building housing prices. Nevertheless, Xing Yun home in Ningbo real estate sector is not well-known, which are mostly located in Fenghua project development locally.

March 11, Xing Shen Yun actual control of home and corporate representatives Chenming Chong Hing Choi, on suspicion of the crime of illegal deposits from the public, was transferred Fenghua prosecutors prosecution.

Household population less than 500,000 in Fenghua, Shen Xing fiscal known him from a mason, contractors started, the Xing Sheen do local housing prices leading enterprises.

Fenghua Jinping people intermediaries are responsible Ye Haibo said Shen Xing is a wealth of people concentrate on their work, before they developed waterfront sun, sun tea all other real estate, word of mouth is very good in Fenghua market. However, Shen Xing for business is not good fiscal management, the company is a bit confusing. "The following people make money, and he poured himself did not earn much money."

In Ye Haibo view, the Xing home run down, with its built in "changting transformation of old villages" project and the "Taoyuan mansion" projects.

Yesterday, the village secretary changting village CHEUNG Sin-ming on the "First Financial Daily" reporters, said Xing Sheen had (called "Rouse Properties" below) from the hands of Ningbo Rouse Properties Limited changting then set the transformation of old villages project, 300 acres of land for the implementation of "edge resettlement, while commercial development" mode of operation.

Rouse Properties villagers suffered a boycott in the previous development process, to make the final margin of the project. "Not long thereafter, Xing Yun came in." Informed sources said that the local government after the home run and Hing talk, "That they get to come."

CHEUNG Sin-ming said Xing Yun home construction changting resettlement housing 180,000 square meters, construction costs into five or six billion, now most people have been resettled. But 150 acres of land for commercial development due to the progress of the demolition villagers' opinions, the latter is used to slow the project.

"This place is very difficult to dismantle." Changting village participated in the demolition of a lawyer, said an important reason for this is the difficulties encountered Xing Yun's home.

"Time dragged on for three or four years, costs are rising." CHEUNG Sin-ming said the key is to run home Hing other projects with loans and borrowed high-interest private financing for resettlement housing construction. This is a local housing prices will undoubtedly be under tremendous financial pressure. "I heard about the daily interest be 500,000 yuan."

So, changting Village urban redevelopment project so Hing home run into the "only invest, no output" embarrassment. Taoyuan subsequently developed sites, but also exacerbated tensions funds Xing Yun home buyers.

Hing Yuen mansion is built in high-end home-run villa estate, planning to build three 51 independent villas, 172 semi-detached villas and 23 sets of single apartments and a clubhouse, scheduled to start in December 2011, December 2013 delivery. According to public information, the real estate townhomes minimum from 5.6 million yuan / sets, independent villas highest price of 3,000 yuan / sets.

But in Taoyuan mansion project site, the reporter can not see the shadow of construction workers, construction site also closed the door, only to see half-built villas and townhouses, street billboards huge estate but still bright eye-catching. Ye Haibo said, because in recent years the purchase of other real estate regulatory policies, Taoyuan mansion villa only achieved a small amount of sales.

Real Estate Risk Warning

Ye Haibo believes Xing Sheen's fall, in addition to its mismanagement, but also with the dramatic changes in the property market in recent years relevant. Currently, Fenghua prices fell by about 20% compared to the peak, land prices there have plummeted.

January 2010, Xing Yun home to 660 million yuan photographed Taoyuan mansion block, equivalent to the floor price of 7,852 yuan / square meter; last December, another company took in the surrounding residential plots equivalent to the floor price, but only 3204 yuan / square meter. Compared the two poor.

In addition, late last year, Greentown Group [ Introduction News ] land costs in urban redevelopment project changting neighboring village shot 328 yuan / mu, with a valuation of 10 million yuan before the lot / mu far apart.

CHEUNG Sin-ming said that the transformation of old items from changting village near Central Park [ News Price apartment review ] plots, floor price 7000 yuan / square meter, the industry that only sold for 13,000 yuan / square meter in order to preserve capital. Now, in the central garden price 11,000 yuan / square meter, the price per square meter of some big house only 8,000 to 9,000 yuan. "I have heard that the developers at least several hundred million loss for good."

So there are developers complain insolvent and Fenghua Xing Yun home premium "diving" relevant. A few years ago, when the market is good, the government pushed to the starting price very high, resulting in high prices to get business. Now the market is bad, the government auction to raise rates again starting price set very low, leading to a serious housing prices of existing assets shrink.

In this regard, one Fenghua officials believe that the premium is based on the trend of changes in the market, developers must learn to "swim" in the market. He said that the current provincial government is very concerned about the progress of Xing Yun home event, Fenghua is also actively looking for "disk access" and also several rounds of consultations with banks, hoping to be properly addressed.

In fact, falling house prices, land devaluation, developers under intense development pressure, which has been more common in the four-tier cities.

Merchants [ Introduction News ] Macro Securities head of research at the Development Research Center, told reporters Xie YaXuan event of default is actually not surprising, this is the development of a bank loan risk warning. Not just the banks, other financial institutions and real estate there is a link, it is also a risk warning.

Central Plains real estate market research director, said Zhang Dawei, this case from the real estate loan defaults will undoubtedly promote the tightening of real estate financing, including bank loans and other financing sources.

Part of this story helps explains how home buyers in general have seen costs rise 20-30% in the past year: 澄清降价万科橙难引崩盘 信贷紧或实致京城楼市变局
According to CRIC research institutions research shows that in 22 cities, first home loan lending rate is almost extinct, of which 10 cities go up 5 -15 percent, only 32 percent of the city to maintain the benchmark interest rate. Keep the benchmark interest rate of the original city, Shenyang, Chongqing, Suzhou, Chengdu, Nanjing and other from the benchmark interest rate to 1.05-1.1 times the benchmark.

Dawei computing said that from last year to now, the bank's first home loan interest rates rose from 85% discount to the benchmark interest rate, and even many appear 1.05 times the benchmark rate. A 1,000,000 yuan 30-year loan at 85% discount has a monthly payment of 5,720 yuan, while in the case of interest rate at 1.05 times, the figure rose to 6,571 yuan. (An increase of 15%)

In total, for a 1 million yuan 30 year loan, the higher interest rate results in an extra 300,000 yuan in interest costs. This is equivalent to home prices rising 20% -30%.

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