The property giant borrowed heavily to exit places like Luano
Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic strings fluttering in the wind.
Elsewhere in Luan, statues of the Golden Pegasus guard an unfinished $9 billion theme park that was thought to be larger than Disneyland. At the heart of local leaders’ economic dreams, a planned $4 billion electric-vehicle plant, remains a steel frame with vegetation growing across the street.
The structures are monuments to the once grand ambitions of the China Evergrande Group, Now one of the world’s most indebted property companies, And a case study of how China’s reliance on real estate as an economic engine helped fuel those ambitions.
Evergrande is in trouble Partly because it aggressively developed properties in places like Luan, where as the city’s population dwindled, so did its debt-fueled building spree. It launched hundreds of projects in more than 200 Chinese cities.
As it expanded, Evergrande racked up more than $300 billion in liabilities. In September, it said it was facing unprecedented difficulties and was trying to protect customers. days later, it missed a scheduled interest payment for foreign bondholders. on Monday, Evergrande and its asset-management arm halt business in Hong Kong; The unit said it could be the subject of a takeover bid, which could bring in much-needed cash for Evergrande.
The company’s troubles are among the effects that have surfaced since Beijing worried about the risks to the financial system began last year. Forcing developers to start cleaning up their balance sheets. Global investors are concerned that this action could lead to a financial-market crisis or a protracted real estate meltdown. People buying units in unfinished towers are wondering where their money has gone.
“We’ve spent all of our family’s savings on this apartment,” said Jiang, a 59-year-old farmer who, like Luan’s other buyers, didn’t want to give her first name because she was worried about upsetting the company.
In August, she said, she bought a unit for 890,000 yuan ($138,000) in an Evergrande project called Junting, or “Jade Palace,” with 47 apartment buildings. Locals said that the work had come to a halt months ago. Ms Jiang said she did not know when—or if—it would start again. “We really don’t know what to do,” she said.
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Evergrande has completed several projects and handed over homes to buyers in Luan over the past decade. A spokesperson for Evergrande said the company will make every effort to ensure its projects are delivered “wherever the city or region is”. Luan officials did not respond to requests for comment.
Central to Evergrande was an extension A real estate economy across China In which from developers to financiers to city leaders there was impetus to keep the boom going. Evergrande found a market for its projects among a range of buyers – including corporate workers and farmers seeking to move to more urban areas – who believed that prices would not matter and assumed that Beijing will save them from the fall.
For local leaders, developers represent a revenue stream. With limited tax power, Chinese cities get about a third of their revenue from selling land to property developers like Evergrande. Cities annexed agricultural land to sell to developers; Farmers often get to buy apartments at a discount.
Real estate became the biggest economic driver and most important source of revenue for some cities. Luan’s total tax revenue from land sales was $1.2 billion compared to $900 million in the first half of this year.
But property building in smaller cities has run well ahead of demand from potential occupants in China for the past five years, making the market increasingly dependent on speculators and investors to buy properties, said Logan Wright, a China research firm with Rhodium. The group has director of research. Based in New York. According to data from the China Household Finance Survey, about 21% of homes in urban China were already vacant in 2017, which equates to 65 million vacant units.
As china broke downNew home construction has slowed down and housing prices are falling in many places. According to the Rhodium Group, local governments’ land-sale revenue declined 17.5% in August from a year earlier.
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The sharp decline in China’s property market could “extend and increase downward pressure” on the job market and China’s overall economy. Goldman Sachs Economists have warned in a recent note. By some estimates, real estate-related activity now accounts for about one-third of China’s economy.
Most economists and investors believe that the Chinese government will restructure Evergrande. At the end of last month, The People’s Bank of China said it would “maintain the healthy development of the property market” and protect the legitimate rights and interests of home buyers.”
Still, economists say economic activity will be lost if Beijing continues to eliminate excess debt and root out speculation in real estate.
It appears that some Evergrande projects have performed better in larger cities. Some Chinese media have reported that it halted construction on some developments in southern China’s Guangzhou, with construction on some projects resuming in late September.
Luan has lost 5% of its population in the last 10 years. Government data shows that many of Luan’s four million people are over 60 and residents have a median annual disposable income of $3,500, well below the national average of about $5,000.
Yet from 2011 to 2020, Evergrande invested more than $10 billion and launched several major projects in Luan, including a residential complex, an EV plant and a “Fairyland” theme park with pastel-colored European-style pedestrian walkways. Blocks and a melange are included. Animal characters, including a reindeer-like creature and a blue dragon.
In late September, The Wall Street Journal closed construction on four unfinished Evergrande projects in Luan. Nearby store owners described the loss of business after construction workers stopped coming. In an office in Evergrande, employees took naps or sat down on smartphones.
According to a journal search on China’s corporate database Tianyancha, at least 23 lawsuits involving commercial bills—a form of IOU between Chinese businesses—have been filed this year against Evergrande’s subsidiaries in Anhui province, where Lu’an is located. Is. The plaintiffs included manufacturers of paint, cables, concrete and elevators, as well as construction companies. The Journal did not find any such lawsuit in the database in the previous year.
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Evergrande was founded in 1996 in Guangzhou by Xu Jian, who local media says grew up as the son of a woodcutter in a poor village. He became known as Hui Ka Yan, his name in Cantonese.
Mr. Hui expanded Evergrande into a nationwide powerhouse with more than 150,000 workers, reporting record sales year over year as home prices rise. According to research firm Hurun Report, Evergrande’s share price soared more than fivefold in 2017, a year Mr Hui temporarily became China’s richest man.
The company raised money by preselling units for a cash advance to home buyers, who then waited for buildings to be up. Research firm Capital Economics estimates that its creditors include buyers of 1.4 million apartments that Evergrande previously promised to sell and build, but has yet to fulfill. Evergrande also borrowed from banks and foreign investors.
It expanded beyond real estate, becoming involved in mineral-water production and purchasing a professional soccer club. it joined Electric-vehicle industry with Hong Kong-listed EV unit, China Evergrande New Energy Vehicle Group Ltd., whose market capitalization once reached $87 billion, exceeded most global auto manufacturers at the time.
In 2017, it entered the theme-park business, launching 15 projects totaling more than $100 billion in total investments, according to the Journal’s calculations based on local-government numbers. Around that time, the Dalian Wanda Group, a group that vowed to outlaw Disney parks in China, said it was Backing out of business after taking on a lot of debt.
Major cities such as Beijing and Shanghai held tight to the supply of land for new construction, so Evergrande—like many other developers—turned to smaller and more out-of-the-way cities such as Luan, which had little to sell. There was a lot of land.
When Evergrande began buying land around Luann around 2011, it was a sleepy spot known primarily for Luan Melon seed tea. Evergrande launched at least half a dozen major residential projects in the area, while other major developers also arrived.
Buyers often stand in queues for hours or go by the lottery to angle for apartments. Evergrande was publicly praised by a senior official in Anhui province in 2012, local media reported, “the strength in scale and the brand name make it a dragon-head-like enterprise in China with international influence.”
Between the end of 2019 and September 2021, Evergrande was Luan’s largest developer, with 8,123 new apartments based on the number of apartments sold before their construction was completed, according to a journal count using information from the housing authority of Luan. With the sale of the apartment.
Evergrande added commercial buildings and a movie theater. In 2019, it bought 14 more lots in Luan, bringing the city’s land sales that year to more than $2.6 billion, according to Anhui Land Information Network, a research firm that tracks government land auctions. The sale prompted the local government to triple its fiscal-revenue budget for the year.
Around that time Evergrande selected Luan for one of its EV subsidiary’s plants. Evergrande said it would produce 500,000 cars, generate $15.5 billion in industrial output each year and contribute $1.2 billion in annual tax revenue for the local government, according to local media.
As housing projects grew and residents moved to completed projects, Luan transformed into an urban sprawl spanning nearly 6,000 square miles, with rows of housing-blocks surrounded by farmland. New York City is approximately 300 square miles.
Evergrande has faced cash crunch over the years but has always overcome them. Then in August 2020, Beijing announced plans to crack down on developers’ excessive borrowing through “three red lines,” which barred the company from taking on new loans.
Evergrande’s real estate, theme park and EV subsidiaries reported losses during the first half of 2021. This summer the cash with the company became so low Started paying some suppliers with unfinished apartments, the Journal has reported. In Luan, the local government website was flooded with complaints, with some buyers of unfinished homes fearing they would lose their life savings or become homeless in retirement.
Among the projects that appeared to have stalled construction last month were a large unfinished section of Evergrande’s Yujingwan, or “Imperial Scenery Bay”, a complex spread over several blocks. Across the street, a woman giving her name as Ms. Wang, 41, was selling drinks and food items on a recent day at a convenience store that opened in 2017.
Ms Wang said she bought an apartment in the complex’s so-called sixth phase last year for more than 400,000 yuan after Evergrande offered her a nearly 35% discount. He had borrowed from friends and relatives to buy a new home, which he said would be ready in 2023.
She said she was confident that the government, or perhaps a state-owned enterprise, would take steps to complete the project. Other buyers echoed that belief.
It is not clear where the money that developers like Evergrande have collected from home buyers through presales is going. In several cases, the Journal has reported, Developers use that cash as normal money for operations.
The Evergrande theme park was partially underway at the end of September, with some small-scale attractions and a handful of restaurants open. Unfinished apartments are perched atop the park. The carousel was closed.
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