Is the Chinese real estate market threatened with a crash? And how big is the impact on other housing markets? In an interview with Handelsblatt, Tobias Just, Professor of Real Estate Management at the IREBS International Real Estate Business School at the University of Regensburg and co-editor of a specialist book on the Chinese real estate market, explains the consequences of the giant’s crisis on the housing market – and how dangerous the situation in Germany is is.
Professor Just, the second largest Chinese real estate financier Evergrande is struggling to survive. How dangerous is that for the Chinese real estate market?
I believe that Evergrande’s problems can in principle be managed – but indirectly, the crisis is very dangerous for the market. The inclination of Evergande is ultimately only the most visible and greatest inclination. Even smaller developers are sometimes heavily burdened. If Evergrande should tip over, their financing terms will continue to deteriorate. This could trigger a domino effect. That is why the rescue of Evergrande is so important for the Chinese state.
For years, the motto in China was build, build, build. Is this trend now coming to an end?
A definite yes and no. In China there has been a large number of vacancies in residential properties, offices and retail properties for a long time, because building was often speculative. So far, however, these speculations have often been successful, at least in the medium term, because the influx of people into the big cities in China has been very strong. However, that is now gradually subsiding. So the market is starting to stutter because influx is to be limited, at least in some major cities like Shanghai. Growing online retailing is also slowing down demand in stationary retail. But there is still a lot of catching up to do. I think the biggest boom is over – but there are still enough structural reasons for long-term growth – but not at the same pace anymore. And exactly then oversupply is possible.
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Chinese consultants speak of a vacancy rate of 90 million new apartments. Are we watching a real estate bubble burst?
Other estimates come to 50 million apartments. This difference alone says a lot about the lack of transparency and the size of the market. This has been a problem in China for a long time. And now Evergrande is making it more difficult to finance housing – it will very likely have a negative impact on prices. But I suspect that after a dip the trend of rising prices will continue, but it will level off. It may be that Evergrande acts like a clearing thunderstorm.
Why is the government now counteracting the debt of the real estate companies?
The central government in China has been trying for years to reduce the indebtedness of domestic real estate financiers and to cool the real estate markets. But Evergrande has compensated for the lack of access to domestic bank credit by issuing bonds. Other developers have done the same, but not in the dimension. The group is now also making mistakes of its own.
The professor for real estate economics is an expert on the Chinese real estate market.
(Photo: IREBS Real Estate Academy)
Critics warn of a Lehman effect in China. How great is the danger?
I think the comparison with Lehman doesn’t fit. At Evergrande, the debt is mainly in China, the interdependence with other countries is much less, as far as we currently know. The numbers we hear at Evergrande are gigantic. But behind this there are also buildings that can be used comparatively well and arable land. That is the difference from Lehman’s collapse. But where the comparison works is that the government is faced with exactly the same difficult decision as to when and how to intervene.
Why is the state taking so long to decide whether to save Evergrande?
I believe that an example is being made in Evergrande. The state wants to set clear boundaries – and the central government may not want to set any incentives for other drifting companies to enter into risky business. The state must not appear too simply and not too early as a white knight.
Do you expect the group to be broken up in the end?
That is sure to be an option that is on the table. Parts could just as well be sold off, the state bank could offer the group financing, or other companies could be urged to forego some of the claims.
Are China and its real estate market a special case, or do you see other real estate markets around the world facing a crisis?
Well, wherever real estate markets are rising strongly, a lot is financed with outside capital and there is speculation on unrealized income, you have a problem. So you don’t even have to look to China: Such elements can also be found in some markets in Europe and the USA. But we’re not talking about the same levels of debt as they were before the real estate crisis in 2006 – mainly because banks in the West have become much more cautious and are demanding more equity for financing. I don’t see any great danger for Germany, and a case like Evergrande is currently unthinkable in the USA, because the companies are not as big as in China.
China regulates the domestic tech companies, takes action against the gaming industry and sets limits on real estate companies. How dangerous is this mixture?
That is an important question. But when it came to real estate, China had little choice. To do nothing would have been fatal. The procedure is now draconian – but it comes with an announcement, the list of regulatory real estate market interventions is long. Evergrande shows how susceptible the model has been to speculatively relying on strong sales of already built apartments. The government has long been busy with structural clean-up work – but most acutely with fire extinguishing.
Professor Just, thank you very much for the interview.
More: Second largest shareholder in Evergrande plans to sell entire stake