In early 2023, one of the country's largest and most trusted developers expressed quiet confidence as a wave of defaults shook China's real estate industry to its core.
“We are one of the few companies that can still rely on our credibility,” China Vanke, China's second-largest homebuilder, said last year. The company said it had overcome “numerous difficulties” to deliver 340,000 homes in 2022, more than was built in the UK during the same period.
A year on, ratings agency Moody's this week downgraded the company and estimated sales in January and February were down 40% compared with the same period last year, amid a slowdown in Chinese real estate that began with defaults in 2021 In part, that confidence has turned into concerns that China Evergrande's influence shows few signs of waning.
The downgrade of Vanke, which is partly owned by Shenzhen Metro, suggests that even a developer with significant state support is not immune to a crisis of confidence among ordinary Chinese homebuyers, while a plunge in its bond prices points to similar pessimism about its financial health. . healthy.
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Vanke, founded in 1984 by mountaineer and social media personality Wang Shi, had revenue of 504 billion yuan ($70 billion) in 2022, according to its latest annual report. Like many of its peers, the business emerged during China's real estate privatization process in the 1990s. Shenzhen Metro holds a 28% stake in the company, placing it between private and state-owned companies.
The developer has 1,000 projects under construction in China, according to its website, and a string of internationally renowned projects in cities such as London and Milan. The company has also expanded into other areas, including developing a pork business in 2020, when African swine fever led to the culling of large numbers of pigs in China.
Moody's senior vice president Kaven Tsang said Moody's this week stripped Vanke of its investment-grade rating without “considering any state support or government support or even stakeholder support”. Rating agency president.
“Let's see [property] As a very commercial and competitive industry in China, we do not expect the government to provide direct support to individual developers,” he added.
Chen Long, co-founder of research firm Plenum, said offering potential support to Vanke would be tricky for the government because other developers might question why they didn't get similar treatment.
Chinese developers often sell projects before they are completed, bringing in cash to pay for work. But that model has been shaken by construction delays at failed groups such as Evergrande, leading homebuyers to question whether they will receive their properties and hampering new land purchases and investment.
Vanke, which mainly builds high-rise buildings, qualified for special funds from state-owned banks at the end of 2022. But the company has not issued any new debt since July, according to Moody's.
Around that time, Country Garden, until recently mainland China's largest developer by sales, began defaulting on payments on its international bonds. The company, like Vanke, was initially thought to be immune to the sector's financing problems but ended up defaulting on its U.S. dollar bonds for the first time in October.
Sentiment about broader markets has deteriorated since then. Prices for new homes in China have fallen slightly each month since last June. Vanke's bonds were trading at stable levels at the start of the year but are now showing signs of worsening distress.
Lu Ting, chief China economist at Nomura Securities, wrote this month that a “property recovery” is currently “not in sight” and developers are reluctant to buy land. He estimated that national land transfer revenue may drop to RMB 290 million in 2024, compared with RMB 320 million in 2023 and RMB 400 million in 2022.
At the recent China Rubber Stamp National People's Congress annual meeting, Yi Gang, former governor of the People's Bank of China, mentioned the need to establish a pre-sale insurance mechanism, which he said would help the market transition to a sales-focused market within three years. Mainly completed houses.
John Lam, head of real estate research for China and Hong Kong at UBS, said he believed the industry would shift in this direction in the future, but added that it would be detrimental to developers' internal rates of return and return on equity. Vanke's Hong Kong-listed shares have fallen 53% in the past 12 months.
There are signs the company is taking steps to shore up its finances. In February, the company sold a stake in a Shanghai plaza for $451.2 million. Vanke said in a statement this week that its “operating fundamentals” were “normal.”
Beijing has introduced a series of policies seeking to reduce debt across the real estate sector after concerns over overheating in housing prices in 2020, but has yet to roll out any major stimulus measures.
Other developers that borrowed heavily to fuel rapid expansion have restructured their debt or are discussing doing so.
Standard & Poor's and Fitch Ratings still give Vanke an investment-grade rating, with Fitch downgrading Vanke's rating in October citing weak sales. The group's offshore debt is only US$2.6 billion, while Evergrande's offshore debt exceeds US$20 billion.
But any eventual failure for Vanke would be an even bigger repudiation of China's leveraged model of real estate development, which until recently proved highly profitable.
An offshore bond trader at a Chinese state-owned bank in Hong Kong said its bonds “are still too expensive.” “The risks are not commensurate with the rewards.”
Additional reporting by Wang Xueqiao in Shanghai
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