The “Proposals of the Central Committee of the Communist Party of China on Formulating the Fourteenth Five-Year Plan for National Economic and Social Development and Long-Term Goals for 2035” reviewed and approved by the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China once again emphasized “promoting the stable and healthy development of the real estate market.” As the most important subject in the real estate market, the steady operation and standardized development of real estate enterprises will directly affect or even determine the steady and healthy development of the real estate market.
Since 2017, under the central government’s series of policy arrangements to prevent and defuse financial risks, the leverage ratio of various industries and sectors of the national economy has shown a certain downward trend. However, it is worth noting that the long-term high-leverage operation model of the real estate industry, especially real estate development enterprises, has not been significantly improved in the context of the prudent management of real estate finance. With the huge impact of the new crown epidemic at home and abroad on the supply and demand sides of the real estate market, the asset-liability ratio of real estate development companies has shown an upward trend against the trend.
The debt risks of real estate companies under the impact of the epidemic are highlighted
Since the reform of the real estate market in 1998, the total debt of real estate development enterprises has increased year by year. By the end of 2019, the total debt of national real estate development enterprises reached 76 trillion yuan, accounting for 76.7% of GDP. Affected by the new crown epidemic, the sales area of residential, office and commercial premises nationwide in the first three quarters of 2020 decreased by 1.0%, 16.5% and 15.3% year-on-year respectively. Judging from the sales performance of the 23 leading real estate companies that have been announced in the first three quarters, the average sales target completion rate is only 67.1% of the full year, and only 2 companies have the annual sales target completion rate exceeding 75%. Due to sales collections and delays in the resumption of work, severe turbulence in real estate stocks, strict financing supervision, no obvious loosening of policies, and the ensuing peak period of concentrated payment of credit bonds and other interest-bearing liabilities, the risk prevention and control of real estate companies Tasks and pressure are gradually increasing.
(1) The high-leverage operation mode remains unchanged, and the risk of debt default continues to increase
Since the 18th National Congress of the Communist Party of China in 2012, the asset-liability ratio of the industrial and real estate industries has generally shown a downward trend, while the asset-liability ratio of real estate development companies has risen against the trend. In 2019, the industrial asset-liability ratio was 58.6%, the asset-liability ratio of the real estate industry was 68.6%, and the debt ratio of real estate development enterprises was 80.4%. According to the 2020 mid-year report data of 172 listed real estate companies in Shanghai and Shenzhen, in accordance with the “three red lines” standard (that is, the asset-liability ratio of the real estate company after excluding the advance receipts shall not exceed 70%, the net debt ratio shall not exceed 100%, and cash The short-term debt ratio is not less than 1 times”). Currently, 121 listed real estate companies have stepped on the line, accounting for 70.4%. Among them, 19.2% of listed real estate companies stepped on the “three red lines”, 18.6% of listed real estate companies stepped on the two red lines, and 32.6% of listed real estate companies stepped on the middle.
Since the outbreak of the new crown epidemic, real estate companies have seen a significant increase in judicial and business risk items such as new lawsuits, untrustworthy violations, business abnormalities, administrative penalties, and serious violations. From January to October 2020, there are as many as 294 real estate development companies that have issued bankruptcy documents on the People’s Court. According to calculations, in 2020, real estate companies will usher in a peak period of concentrated redemption of credit bonds and other interest-bearing liabilities, and the industry’s due debt is about 1.46 trillion yuan. Many large real estate companies, such as Xinhualian Holdings, Shanshui Wenyuan, and Zhongkun Group, have recently experienced substantial defaults on their due debts. In the downward cycle of the market where financing channels are limited and the debt ratio continues to rise, the “borrowing new and repaying the old” and “borrowing the short and repaying the long” model of repayment at maturity is more common.
(2) The regional difference in asset-liability ratio is large, and the risk pressure of upstream and downstream industries is rising
Affected by regional real estate market trends and regulatory policies, the asset-liability ratios of real estate development companies show large regional differences. The asset-liability ratio of real estate development enterprises in 24 provinces, including Qinghai, Shanxi, and Inner Mongolia Autonomous Region, exceeded 80%. Among the seven provinces with a debt-to-asset ratio of over 85%, five are located in the northwestern region. Except for Shanghai and Heilongjiang, the asset-liability ratios of real estate development companies in other regions are all above 75%. Judging from the distribution of the 294 real estate development companies that have gone bankrupt and liquidated this year, the central and western regions and third- and fourth-tier cities account for a relatively high proportion. As local finance relies heavily on land transfers and the real estate market, the asset-liability ratio of real estate development companies continues to rise, which may further increase the pressure on financial risk prevention and control in some areas.
At the same time, the epidemic has also had a greater impact on the upstream and downstream industries of real estate such as construction engineering, building materials and home furnishings, hotels, exhibitions, and financing guarantees. From January to October 2020, the proportion of relevant companies entering the bankruptcy announcement process also continued to increase. A text analysis of the People’s Court Announcement Network with the keywords of “construction”, “engineering”, “building materials” and “hotel” shows that as many as 218 companies in the above four types of related industries entered the bankruptcy announcement procedure in the first 10 months of this year. 429, 113, and 238, involving as many as 419 judgment documents, copies of complaints and court summons involving “homeownership guarantee”, the severe situation faced by the mortgage guarantee industry under the impact of the epidemic also requires great attention.
(3) The scale of overseas bond issuance by real estate companies has grown rapidly, and the pressure on the prevention and control of foreign debt risks has further increased
Affected by the tightening and tightening of financing controls for domestic real estate companies, many real estate companies are actively seeking overseas debt financing. Since 2015, the scale of overseas bond issuance by real estate companies has continued to increase. In 2017, the scale of overseas bond issuance by domestic real estate companies was four times that of 2016. From January to October 2020, the scale of overseas bond issuance by real estate companies reached 58.674 billion U.S. dollars, which has exceeded the scale of overseas bond issuance in 2018, and most of them are denominated in U.S. dollars. With the spread of the epidemic on a global scale, coupled with the continued volatility of overseas stock markets, commodity prices, liquidity, and the US dollar index, it is increasingly difficult and risky for real estate companies to “borrow the new and repay the old” through overseas debt issuance. At the same time, the maturity of overseas bonds of real estate companies in 2020 will reach 45.3 billion US dollars. With the country’s strict control over overseas financing policies and the continuous increase in the cost of overseas debt issuance, the amount of overseas debt issuance by real estate companies is still showing a rapid growth momentum, which also shows that real estate companies are responding to the peak financing needs of debt repayment.
(4) Increased risk differentiation in the real estate industry
In the context of strict financing supervision and “three red lines”, the concentration of the real estate industry has increased rapidly. Declining profit margins, narrowing financing channels, increasing financing costs, and unreasonable debt maturities have further increased the leverage ratio and capital chain risks of small and medium-sized real estate companies that are in a concentrated debt repayment period. In the first 10 months of this year, there were as many as 67 liquidation announcements involving only the real estate sector, and most of them were small and medium real estate companies. Although the new “three red lines” financing regulations do not disclose more details on the data monitoring and subsequent implementation of unlisted and non-key real estate companies, under the current background of prudent management of real estate finance, the financing environment for small and medium real estate companies has been fully closed. tight. As the follow-up impact of the epidemic continues to ferment, it is especially necessary to pay more attention to the debt risks of small and medium-sized real estate companies and their penetration into the local financial system.
The epidemic has also had a great impact on commercial real estate. In recent years, due to the sluggish real economy and the profound influence of the Internet and e-commerce on the traditional shopping marketing model, the market for office buildings and commercial premises has continued to slump. The wave of rent reductions for office buildings and shops across the country triggered by the epidemic has made it even worse for commercial real estate companies that are already in a down cycle. Many large-scale real estate companies with a relatively high proportion of commercial real estate, such as Wanda Group, Xincheng Holdings, Zhongdi Hebang and Nanguo Real Estate, are facing very huge operational challenges under the impact of the epidemic.