Is This the Beginning of the End of China’s Real Estate Market?

Earlier this week, a major property developer in Shenzhen, China, made news when it was unable to repay a RMB2.5 billion trust it had created to fund its development projects.

The developer in question, Kaisa Group Holdings, might be the first property developer in China to infamously be unable to repay foreign currency loans. This episode is a chilling reminder for investors on the state of China’s real estate market.

For investors in Singapore’s stock market, this can be important to note too given that there are companies listed here with large exposure to the country’s real estate market.

The threads that bind

But first, let’s make it clear – it absolutely does not make sense to view China’s real estate market as just one homogeneous market. A minor Tier 2 or Tier 3 city in China might already be larger than Singapore in terms of both population and physical size. At such scale, it is thus not possible to analyse China’s real estate market as one single entity.

Yet, there are still common themes that tie up all the disparate parts of China’s real estate market – and that is, the Chinese government’s introduction of various property-cooling measures over the past few years (not unlike here in Singapore) to prevent a real estate bubble from forming. Then, there are also general concerns about China’s shadow banking sector and how it might be fueling unnecessary speculative actions in the country’s property market.

Downdrafts in sentiment

With Kaisa Group’s default this week, we see the possibility of cracks forming in the system. Although the Shenzhen Government is currently orchestrating a bailout for Kaisa Group and investors in the company’s trust might not suffer much losses, there’s still a knotty problem for the company’s customers.

In particular, they are customers who have bought properties from Kaisa Group which are still under construction.

It has been reported by the Wall Street Journal that “hundreds of apartment units [of Kaisa Group’s development projects], many of them under construction but already sold, have been locked down in Shenzhen.” This has caused buyers of Kaisa Group’s properties to wonder if their properties can be completed at all. This won’t be good for the confidence and sentiment of property buyers .

Contagion effects

Warren Buffet once said “never is there just one cockroach in the kitchen.” Is Kaisa Group just one of the many roaches amongst property developers in China?

As mentioned earlier, Singapore is also home to many Chinese property developers, not to mention companies with large exposure to China’s residential real estate market. A company like Yanlord Land Group Limited (SGX: Z25) would belong to the former, while a company like CapitaLand Limited (SGX: C31) would belong to the latter.

Looking at their balance sheets, the duo seem to have relatively strong finances with debt to equity ratios of around 70%. In contrast, Kaisa Group is a lot more heavily leveraged with a debt to equity ratio of well over 100%. This means that the Singapore-listed duo are facing much lower financial risks than Kaisa Group.

But, will Kaisa Group’s default on its trust fund negatively affect others in its industry? Is the default of Kaisa Group the signal for the beginning of the end of the Chinese property market? Only time will tell.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.