The global tremors from China’s real estate crisis are onlystarting

NeilCallanan and Ainslie Chandler

Feb 11, 2024 – 1.17pm

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Chineseinvestors and their creditors are putting up “For Sale” signs on real estateholdings across the globe as the need to raise cash amid a deepening propertycrisis at home trumps the risks of offloading into a falling market. The pricesthey get will help finally put hard numbers on just how much trouble the widerindustry is in.

Theworldwide slump triggered by borrowing-cost hikes has already wiped more than$US1 trillion ($1.54 trillion) off office property values alone, StarwoodCapital Group chairman Barry Sternlicht said last week.

CountryGarden last year sold the remaining portion of its huge Windermere estate inMelbourne’s west for about $250 million.

But thetotal damage is still unknown because so few assets have been sold, leavingappraisers with little recent data to go on. Completed commercial propertydeals globally sank to the lowest level in a decade last year, with ownersunwilling to sell buildings at steep discounts.

Regulatorsand the market are nervous that this logjam could be concealing large,unrealised losses, spelling trouble both for banks, who pushed further intobricks and mortar lending during the cheap money era, and asset owners.

New YorkCommunity Bancorp touched a 27-year low on Tuesday after slashing its dividendand stockpiling reserves in part because of troubled real estate credit. TheEuropean Central Bank is concerned that banks in the region have been too slowto mark down the value of loans and the UK’s Financial Conduct Authority is toreview valuations in private markets, including real estate.

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Now, a newbatch of overseas assets acquired in a decade-long Chinese expansion spree arestarting to hit the market as landlords and developers decide they want cashnow to shore up domestic operations and pay off debts – even if that meanstaking a financial hit. Beijing’s crackdown on excessive borrowing has left fewdevelopers unscathed, even those once considered major players.

A unit ofGuangzhou-based China Aoyuan Group, for example, which is in the middle of a$US6 billion debt restructuring plan, sold a plot in Toronto at about a 45 percent discount to the 2021 purchase price late last year, according to dataprovider Altus Group.

“Withmotivated sellers, the market freeze could thaw, improving transparency andprice discovery,” said Tolu Alamutu, a credit analyst at BloombergIntelligence. “Portfolio valuations may have further to fall.”

Starting to move

With everytransaction, the market gets more clarity about the capitalisation rate – ameasure of the return an investor is willing to do a deal at. That data willthen be used by appraisers to value other assets, which could trigger widerimpairments. As a consequence, landlords may have to inject more money to cureany loan-to-value breaches or risk having the properties seized by lenders.

While sofar there has only been a trickle of Chinese-owned sales in Europe – last yeara London office building linked to Shimao Group Holdings chairman Wing Mau Hui sold for about a 15 per cent discount to an earlier sale agreed in 2022 that did not close, according to a person with knowledge of the matter – the volume is starting to grow again.

Last week,distressed developer Guangzhou R&F Properties agreed to sell its stake in a£1.34 billion ($2.6 billion) property project in London’s Nine Elms district inreturn for some of its dollar bonds and 10 pence, while an office block inCanary Wharf is selling for 60 per cent less than it sold for in 2017 after itwas seized by lenders from a Chinese investor.

The salesare part of a rebound in disposals after some developers paused for breath lastyear while working on restructuring plans.

“Pricediscovery will improve throughout the year,” Carol Hodgson, head of real estateresearch for Europe at JPMorgan Asset Management, wrote last month. That is inpart due to “a pick-up in distressed assets coming to market”, she added.

Earlierthis month, a luxury development in the heart of Mayfair, an upscale area inwest London, collapsed into administration after defaulting on its loans. It’smajority owned by two Chinese investment firms, Citic Capital and Cindat, andthe homes will continue to be marketed to potential buyers through theadministrators.

Furthereast in the UK capital, a person with knowledge of the matter sees a housingproject planned by distressed Chinese developer Country Garden Holdings drawingbids of less than £100 million.

Thesubsidiary took an impairment charge of £10.3 million in 2022, according to aDecember filing. A unit of Shanghai-based real estate firm Greenland Holdings,meanwhile, extended a loan for a skyscraper project in east London thattechnically defaulted last year, a filing shows.

Sales arepicking up outside Europe too, including in Australia. Only a few years ago,ambitious Chinese developers were major players in the local market. Now mosthave largely stopped buying and have pivoted instead to offloading projects.

Notablerecent disposals include the sale by Country Garden’s Risland unit of asite on the outskirts of Melbournefor $250 million. The company has also recently divested a Sydney development asset for about $240 million.

“Sellingof these partial remaining parcels of land is part of Risland’s approach toportfolio optimisation,” Guotao Hu, CEO of Risland Australia said, withoutconfirming details of the sales or prices.

Representativesfor Shimao, Country Garden, R&F, Greenland and Cindat did not immediately offera comment, while calls to Aoyuan’s headquarters went unanswered. Citic referredall questions to the administrator.

To besure, China is by no means the only source of potential distress in thecommercial real estate market. South Korean investors timed a huge bet onoffices badly, and higher interest rates have already caused German and Nordiclandlords to sell off properties at large discounts.

A wave ofloans maturing in the US are also expected to lead to foreclosures by regionalbanks and sales of the underlying assets. But China is the market where perhapsvendors have the most incentive to sell quickly.

The widerimpact of such disposals will be determined by just how seriously the markettakes the results, said Peter Papadakos, a real estate analyst at Green Street.

“It isdebatable whether valuers will take them fully into account given the sellersare ‘motivated,’” said Papadakos. “In my opinion, they should.”