China’s real estate crisis is starting to spread around the world
(Bloomberg) — Chinese investors and their creditors are putting “for sale” signs on real estate properties around the world, as the need to raise money amid a deepening real estate crisis at home outweighs the risks of unloading it in a bear market. The prices they finally get will help put hard numbers on the scale of the problems facing the wider industry.
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The global recession caused by rising borrowing costs has already wiped out more than $1 trillion in the value of office properties alone, Barry Sternlicht, chairman of Starwood Capital Group, said last week. But the total damage remains unknown because so few assets were sold, leaving appraisers with little recent data to follow. Completed commercial property deals globally fell to their lowest level in a decade last year, with owners unwilling to sell buildings at deep discounts.
Regulators and the market worry that this impasse could hide large unrealized losses, causing problems for both banks, which rushed more into physical lending during the era of cheap money, and asset owners.
New York Community Bancorp touched a 27-year low on Tuesday after it cut its dividend and stock reserves in part due to troubled mortgage credit. The European Central Bank is concerned that banks in the region have been too slow to write down the value of loans, and the UK’s Financial Conduct Authority is set to review valuations in private markets, including property.
Now, a new batch of offshore assets acquired in China’s decade-long wave of expansion is starting to hit the market as owners and developers decide they now want the money to support local operations and pay down debt — even if it means taking a financial hit. Beijing’s crackdown on excessive borrowing has left only a few developers unscathed, even those once considered major players. For example, it sold a unit of China Aoyuan Group Ltd. Guangzhou-based Plc, which is in the middle of a $6 billion debt restructuring plan, sold a plot of land in Toronto at a discount of about 45% to its 2021 purchase price late last year, according to data provider Altus Group.
“With motivated sellers, the market freeze could thaw, improving transparency and price discovery,” said Tolu Alamuto, credit analyst at Bloomberg Intelligence. “Portfolio valuations may decline further.”
With each transaction, the market gets more clarity on the capitalization rate – a measure of the return at which an investor is willing to enter into a deal. This data will then be used by valuers to value other assets, which may lead to broader asset impairment. As a result, landlords may have to put in more money to cure any loan-to-value ratio violations or risk having the property seized by lenders.
Although there have so far only been a few Chinese-owned sales in Europe – last year, a London office building linked to Shimao Group Holdings Ltd was sold. Wing Mao Hui, Chairman of the Board of Directors, for a discount of approximately 15% on a previous sale agreed in 2022 that was a great success. Not soon, according to a person familiar with the matter, as the size has begun to grow again.
Just this week, troubled real estate firm Gwangju R&F agreed to sell its stake in a £1.34 billion ($1.69 billion) property project in London’s Nine Elms district in exchange for some of its dollar and 10-pence bonds, while selling an office building in Canary. The Wharf is selling for 60% less than it sold for in 2017 after lenders seized it from a Chinese investor. The sales are part of a rebound in dispositions after some developers paused for breath last year while working on restructuring plans.
“Price discovery will improve throughout the year,” Carol Hodgson, head of real estate research for Europe at JP Morgan Asset Management, wrote last month. This is partly due to “a rise in distressed assets coming into the market,” she added.
Earlier this month, a luxury development in the heart of West London’s upmarket Mayfair district collapsed into administration after defaulting on its loans. The shares are majority owned by two Chinese investment companies, CITIC Capital and Bonds, and the homes will continue to be marketed to potential buyers through officials.
Further east in the UK capital, a housing project planned by troubled Chinese developer Country Garden Holdings Co., a person familiar with the matter, said. It attracts bids of less than £100m. The subsidiary took an impairment charge of £10.3 million in 2022, according to a December filing. Meanwhile, a unit of Shanghai-based real estate firm Greenland Holdings Corp. provided a loan for a skyscraper project in East London that technically defaulted last year, the filing shows.
Sales are rising outside Europe too, including in Australia. Just a few years ago, ambitious Chinese developers were major players in the local market. Now most have largely stopped buying and instead focused on offloading projects. Notable recent disposals include Country Garden’s Risland unit selling a site on the outskirts of Melbourne for A$250 million (US$163 million), according to local media. The company also recently divested a development asset in Sydney for about A$240 million, according to another local media report. “The sale of the remaining partial plots is part of Risland’s approach to portfolio optimization,” Risland Australia CEO Gutao Hu said in a statement to Bloomberg, without confirming sales details or pricing.
Representatives for Shimao, Country Garden, R&F, Greenland and Cindat did not immediately provide comment, while calls to Aoyuan headquarters were not returned. CITIC referred all questions to the administrator.
China is certainly not the only source of potential distress in the commercial real estate market. South Korean investors’ bet on offices has been poorly timed, and already high interest rates have caused landlords in Germany and the Nordics to sell their properties at deep discounts. The wave of outstanding loans in the US is also expected to lead to foreclosures by regional banks and the sale of underlying assets. But China is the market where sellers may have the greatest incentive to sell quickly.
The broader impact of such actions will be determined by how seriously the market takes the results, said Peter Papadakos, a real estate analyst at Green Street.
“It is debatable whether appraisers will fully take it into account given that sellers are motivated,” Papadakos said. “In my opinion, they should.”
-With assistance from Jack Siders, Natalie Wong, Erin Hudson, Emma Dong, and Amanda Wang.
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