Beijing’s Squeeze On Fragile Real-Estate Developers

“Housing is for living, not for speculation,” has been a Chinese government mantra for almost half a decade. This year, it appears that slogan finally has teeth. But new restrictions on bank lending leave developers tapping a unique source of funding, which could have damaging consequences of its own.

Late last year, Chinese regulators announced that property lending should make up no more than 40% of banks’ total lending, effectively putting an end to years of steadily increasing exposure to real estate.

Looking across major Chinese banks’ results for 2020, they are very much at that limit in aggregate. At the big four—Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China—real-estate lending ran to between 37.5% and 42.2% of total loans, according to Capital IQ.

That adds to the squeeze on bond issuance from Beijing’s “three red lines” policy, which restricts further borrowing if developers don’t satisfy three leverage benchmarks. Most don’t, and issuance has eased to the smallest amount in three years in early 2021—down by a third relative to the same period in 2019—according to S&P Global Ratings.

That means a further shift to the last meaningful source of funding left, deposits direct from home buyers, is inevitable.

Deposits often constitute a large proportion of the property’s value and are now largely paid upfront, long before a property is actually built. Without a national escrow system in place, this allows developers to use today’s deposits to fund yesterday’s commitments.

China Vanke, one of China’s largest developers, reported 53.52 million square meters (about 576 million square feet) of projects it has sold but which remain unfinished. That is equivalent to more than 18 months of completions at last year’s building rate. Vanke’s unearned revenue figure—payments accepted for work not finished—sits at $104.15 billion, more than three times its level at the end of 2015, and jumped by around $7.8 billion in the first three months of 2021 alone.

That accelerated shift is also clear from official industrywide data. Deposits are now the largest single source of real-estate developer funding, and in the 12 months to March, deposits and advance payments rose 23.9%, far outstripping the 14.1% growth in other funding sources.

That makes domestic news reports about a growing number of frustrated buyers worried about repeated delays to construction, like one carried by Xinhua News Agency earlier this month, particularly interesting and concerning.

Chinese home buyers aren’t sophisticated creditors like bondholders or banks, but they carry unparalleled political weight. Leaving them to foot the bill for the excesses of fragile real-estate developers is a risky decision.

Sonny Bono’s former estate, a piece of local history in Palm Springs, California, has come up for sale.

The desert residence, on the market for $7.49 million, was home to the singer, songwriter, congressman and Palm Springs mayor from 1986 until his death in 1998, records show.

“Opportunities like this simply do not come around often,” said listing agent Louise Hampton with Berkshire Hathaway HomeServices California, who brought the home to the market last month.

“A hillside estate of this size, with this level of privacy and this historical connection stands among the most compelling offerings in today’s desert market.”

Bono was perhaps most famously the other half of singing duo Sonny & Cher, but also served as the mayor of Palm Springs from 1988 to 1992, and as the U.S. representative for California’s 44th district from 1995 until he died in a skiing accident in 1998 at the age of 62.

Located in the city’s Mesa neighbourhood on a hillside parcel, the colourful seven-bedroom property combines Mid-Century Modern design with Italian influences across its almost 9,000 square feet and multiple structures.

The house last changed hands in 2021 for $4.35 million. The sellers couldn’t be reached for comment.

There’s a great room, a formal dining area with a rock fireplace, a chef’s kitchen with two wine fridges.

The seven bedrooms include a primary suite with a walk-in closet and a “spa-style” bathroom with a soaking tub and steam shower, according to the listing. Several of the home’s guest suites include private patios or separate entrances.

Outside, there are lawns, olive trees, date palms and cacti alongside terraces, a new travertine pool deck, a pool, a tennis court and an oversize motor court with space for more than a dozen vehicles.

Beijing’s Squeeze On Fragile Real-Estate Developers

Broad bank lending to the real-estate sector, and developers is being squeezed.

The desert residence belonged to the singer, who also served as mayor of the California city, for more than a decade.