China’s real estate companies are in debt and their projects are falling apart, hurting homebuyers

Currently, some Chinese real estate developers are heavily in debt and unable to complete their development projects or fulfill the promised supporting transportation projects. Home buyers who cannot get their properties or feel duped are forced to petition and protest in the absence of official channels of recourse, but ultimately to no avail.

Reuters reported on April 2 that the Taoyuan Xindu Peacock City developed by Chinese real estate giant Huaxia Happiness in Zhuozhou, Hebei Province, China, promised to build a commuter subway line to Beijing, which attracted many foreigners working in Beijing to buy. However, Huaxia Happiness did not build this subway line as promised, and many owners who purchased properties here have asked to surrender their homes or opted to cut off their mortgage payments, and Ms. Zhu is one of the owners who chose to cut off her mortgage payments.

Ms. Zhu, who currently lives and works in Beijing, hopes that cutting off her mortgage payment will bring HHH back to the negotiating table, as many home buyers, including her, have previously organized several petitions and protests, but to no avail.

Ms. Zhu said, “I am from the countryside, so I hope to put down roots in the city and buy a house through my efforts. As a result, this house is now in such a deserted island-like place, am I not coming from the countryside and going back to the countryside?”

At present, Huaxia Happiness has fallen into the debt quagmire. on the evening of March 30, the company issued an announcement that, due to the company’s liquidity stage tension, the company and its subsidiaries have recently failed to repay the principal and interest of debt amounting to RMB 5.595 billion, including bank loans, trust loans and other forms of debt as scheduled. Up to now, the company has failed to repay a total of RMB 37.210 billion of debt principal and interest as scheduled.

In Dali, Yunnan Province, China, Mr. Li, the owner of a small company, is still waiting to move into a house that was supposed to be delivered two years ago.

Mr. Li said, “The developer has promised four times since the end of 2018 that the house would be delivered, and four times it hasn’t been delivered. We don’t have any trust in them anymore.”

Mr. Li is currently crammed into a small rented house with his parents. Another buyer of the project said the developer said it could not deliver the house or the keys yet because it owes money to the contractor.

The plight of Ms. Zhu and Mr. Li highlights the growing debt woes of developers active in China’s small and medium-sized cities, Reuters reported. Many developers in small cities borrowed heavily during the sizzling real estate period of 2016 to 2018, but now find themselves dealing with too much debt, plummeting demand and stricter regulations.

According to data from the Communist Party’s National Finance and Development Laboratory, the amount of debt defaulted by Chinese real estate companies quadrupled to 26.6 billion yuan ($4.1 billion) in 2020, and as of mid-March this year, the amount of bond defaults by real estate companies, led by Huaxia Happiness, had reached 8.7 billion yuan.

The data also shows that domestic and foreign bonds of real estate companies due to mature this year will jump 42% to RMB 900 billion (US$138 billion).

Song Hongwei, research director at Tongze Research Institute, said, “The volume of debt defaults is likely to go up this year, and for the market should pay close attention to the default risk of real estate companies with relatively high debt ratios and large layouts in third- and fourth-tier cities.”

Real estate companies have come under greater pressure this year as the Communist Party’s regulatory authorities have drawn three red lines for them in order to limit the flow of funds from sources including trusts and funds as well as shadow banks into the property sector in the form of loans.

Analysts are concerned about the potential systemic risk from debt defaults, although it is difficult to tell how big the risk is.

Other analysts said that local governments often rely on land sales to raise funds, and as developers control spending, new projects will also affect the ability of local governments to service their debts if there is a long-term downward trend.