Chinese real estate dominoes

it’s unusual that any company’s stock price hits the lower circuit and then (almost) the upper circuit on consecutive days. but that’s exactly what happened to Chinese real estate developer Shimao, which on January 7 (Friday) saw a 20% drop but on January 10 (Monday), saw a rebound of 17%. it’s the latest of its peers to find itself on shaky ground following the Chinese authorities’ push to reduce the dependence of its property firms’ reliance on exorbitant debt.

here’s a look at the situation and its potential implications.

for sale

the plunge on January 7 was following a Reuters report that Shimao had defaulted on a $101 million trust loan repayment. this was a body blow to the company which had already come under pressure in previous months after cancelled sales deals. subsequently, it declared that it would be selling all of its residential and commercial properties, prompting the spike on January 10.

another real estate player, Hong Kong-listed Guangzhou R&F properties, also disclosed in its filings over the weekend that it didn’t have sufficient liquidity to buy back a $725 million bond. it had offered its bondholders the option to proceed with the buyback at a 17% discount on the present due date or buyback half the due amount at full price, but now finds itself short of even the amount required to meet that promise.

ray of hope

the only saving grace in this situation appears to be that the demand for housing and commercial properties have remained relatively stable despite the unfolding crisis. adding this to the healthy growth in demand in India and boom in the US housing market, it would appear that the downturn in China is unlikely to rage across the globe. China’s central bank has also issued assurances it will keep property buyers’ interests at the forefront following its latest quarterly monetary policy committee meeting. it has also vowed to promote ‘healthy development’ of the country's real estate market, signalling some eases on the curbs that pushed companies the sector over the edge.

it is pretty embarrassing when a real estate developer, especially one of the largest in the world, is forced out of its own headquarters to cut costs. it’s also a good sign that it might be best for now to stay away from the likes of Evergrande, despite deep discounts on its shares.