Chinese regulators meet with developer Evergrande as scrutiny on real estate grows – CNBC
BEIJING — Chinese authorities called for indebted property giant Evergrande to resolve its debt risks during a rare meeting with executives Thursday.
Shares of Hong Kong-listed China Evergrande Group have tumbled more than 60% this year to near four-year lows as investors worried about the developer’s ability to repay its debt. The stock closed 1.6% lower Friday, giving up initial gains.
The People’s Bank of China said Thursday in an online statement that it, along with the China Banking and Insurance Regulatory Commission, told Evergrande executives they need to implement the central government’s strategy for stable and healthy development of the real estate market.
The statement added Evergrande needs to “actively resolve” debt risks, support financial stability and disclose true information in accordance with regulations, according to a CNBC translation of the Chinese text.
The comments come a few days after Chinese President Xi Jinping said at a high-level economic policy meeting that the country needs to prevent major financial risks.
Evergrande confirmed the meeting with regulators in an online statement Friday and said it would comply with those specific requests.
As one of China’s largest privately run real estate conglomerates, Evergrande sits at the intersection of major concerns for Beijing: speculation in the property market, high debt levels and the sustainability of an industry that fuels more than a quarter of GDP.
Evergrande has more than 240 billion yuan ($37 billion) in bills and trade payables — such as materials — to settle with contractors over the next 12 months, S&P Global Ratings said earlier this month. About 100 billion yuan, or just over 40%, is due by the end of December, S&P said.
The ratings agency downgraded Evergrande and its subsidiaries to “CCC” from “B-” on Aug. 5 on expectations the conglomerate’s “nonpayment risk is escalating because of increased asset freezes from various commercial parties, indicating strained liquidity.”
“The negative outlook reflects Evergrande’s increasing strained liquidity and nonpayment risk. It also reflects our view that its asset disposal plan, though potentially substantial, lacks visibility or certainty,” S&P said in a note.
An analyst was not available Friday to comment on the meeting with regulators.
Chinese authorities have been trying to limit speculative activity in the property market, which, together with related industries such as construction, accounts for more than a quarter of China’s GDP, according to Moody’s estimates published in a late July report.
Beijing is particularly concerned about a buildup in debt used to fuel property development. In the last year, three “red lines” have emerged for limiting the amount of debt real estate companies can hold relative to their assets.
The latest developments around Evergrande reflect authorities’ focus on limiting risks in the real estate market with greater regulation for the rest of this year, said Bruce Pang, head of macro and strategy research at China Renaissance.
“A favorable regulatory environment and fine-tuning policy curb are crucial to decide whether Evergrande could ride out its crisis smoothly,” Pang said. “Investors will closely follow the potential deals for signs on how much leniency Evergrande has won from Beijing, [regarding] the property sector’s liquidity issues amid a campaign to balance between curbing financial risks and securing social stability.”
The Chinese regulators’ meeting with Evergrande comes as Beijing has accelerated its regulation of different fast-growing industries — primarily tech-related — in the last year.
In early November, the central bank, banking and insurance regulator and other departments met with Alibaba founder Jack Ma and executives of financial technology giant Ant Group. A few days later, Ant had to suspend its massive IPO, and began a series of meetings with regulators that has forced the company to restructure as a financial holding company.
Previously, in the last few years, Chinese authorities have stepped in to limit the debt-fueled expansion of conglomerates such as airline operator HNA and insurance company Anbang.
Rising household debt
Reducing property market risks is even more critical for China since the majority of household wealth is tied up in real estate, at about 70% to 80%, according to Moody’s estimates. The report added about 10% of total household income is related to property.
While authorities have repeatedly stressed that “houses are for living in, not speculation,” Chinese households’ greater preference for investing in property than stocks or other assets has contributed to rising real estate prices.
That, in turn, has caused Chinese household debt to rise.
The balance of consumer housing loans has only climbed over the last several years, to reach 36.6 trillion yuan as of the end of June, according to official data. The 13% year-on-year growth rate was slower than the 14.5% rate of 2020.
The inability of the property market to serve individual housing needs has contributed to a rapid rise in household debt, said Liu Xiangdong, deputy director of the economic research department at the China Center for International Economic Exchanges based in Beijing.
He noted China’s property issues are tied to the education system’s problems. Parents anxious to send their children to top schools have bid up nearby housing prices — which local authorities such as those in Beijing have tried to push back on.
For Evergrande, residential real estate development remains one of its major businesses, but the company has climbed into the ranks of Fortune’s Global 500 list and expanded into industries such as film and entertainment, life insurance and spring water. Evergrande backs Guangzhou’s soccer team and has an electric car unit.
‘All hell is going to break loose’: Property titan and Shark Tank star Barbara Corcoran says Elon Musk is right about commercial office space
If you’re a commercial property giant, Shark Tank star Barbara Corcoran has some bad news for you: The market is going to get much worse before it gets any better.
In fact, it’s going to be a “bloodbath.”
Corcoran echoed the sentiments of Tesla CEO and Twitter owner, Elon Musk, who earlier this week tweeted: “Commercial real estate is melting down fast.”
Speaking to Fox Business’s The Claman Countdown this week, Corcoran—who sold her New York real estate brokerage for $66 million in 2001—said there isn’t enough confidence in the commercial property market post-pandemic.
Despite mandates from big businesses like Google, Amazon, and most recently Meta, swaths of office blocks across the U.S. are still lying partially empty.
According to data from security provider Kastle the average occupancy of offices across America is at just under 50%—with the New York metropolitan area seeing some of the lowest rates of tenancy.
“No one really believes it’s going to turn the corner,” Corcoran said. “People are staying home. Our best office buildings in Midtown Manhattan are 50% occupied, and in most major cities or in secondary cities, we have a 20% vacancy rate. No one wants to take that chance.”
She added that with turbulent economic times ahead she expects to see more businesses defaulting on their loans or mortgages—an issue which will trickle back to regional banks.
Corcoran’s theory is in line with the data: UBS said in April it expects to see more defaults on real estate loans as a result of an expected credit crunch.
“I don’t see that turning around,” the Shark Tank star said. “I think it’s going to be a bit of a bloodbath before it gets better.”
It’s a crisis Elon Musk has sounded the alarm on multiple times—his warning earlier this week, in response to Craft Ventures founder David Sacks highlighting the level of debt about to mature in the sector, was just the latest.
In March the SpaceX founder responded to a tweet about real estate debt with: “This is by far the most serious looming issue. Mortgages, too.”
Vancouver-area home sales rebounded in May, real estate board says
The Real Estate Board of Greater Vancouver (REBGV) says May home sales increased 15.7 per cent compared to the same month a year ago as average prices also rose.
“Our forecast projected prices to be up modestly in 2023 by about two per cent at year-end,” said Andrew Lis, REBGV’s director of economics and data analytics, in a news release.
“Instead, Metro Vancouver home prices are already up about six per cent or more across all home types at the midway point of the year.”
The composite benchmark price for all residential properties in Metro Vancouver was $1,188,000 last month, down 5.6 per cent from May 2022 but up 1.3 per cent from April.
There were 3,411 residential home sales in the region in May 2023, which is a 1.4 per cent decline from the 10-year seasonal average but nearly 500 more sales compared to units that moved in May 2022.
By comparison, in April, home sales slid 16.5 per cent compared to the same month in 2022.
Still, as of April of this year, the number of listings remained low compared to other years, meaning consumer demand is pushing up prices.
There were 5,661 detached, attached and apartment properties newly listed for sale in Metro Vancouver in May 2023, an 11.5 per cent decrease compared to the 6,397 homes listed in May 2022 and 4.3 per cent below the 10-year seasonal average, said the REBGV.
More buyers than sellers
“You don’t have to squint to see the reason prices continue to increase,” said Lis. “The fundamental issue remains that there are more buyers relative to the number of willing sellers in the market.
“This is keeping the number of resale homes available in short supply.”
The board said that mortgage rates, elevated after eight consecutive hikes were carried out, also continue to hold back market activity.
REBGV ideas to improve affordability
The May numbers released by the REBGV on Friday come a day after it announced a series of recommendations it made to a provincial legislative committee that seek to improve housing affordability in B.C.
The REBGV’s proposal includes recommendations for an overhaul of the Property Transfer Tax (PTT), which it says has not changed in 36 years.
It wants the PTT removed on any home, new or resale, worth less than $750,000.
Currently, the tax rate is one per cent of the fair market value up to and including $200,000, two per cent for homes above $200,000 and three per cent for homes worth more than $2 million.
Other recommendations include changes to the proposed anti-flipping tax and convincing the federal government to exempt new not-for-profit rental developments from paying GST.
Vancouver eyes development of last waterfront site – The Globe and Mail
The City of Vancouver is working on a proposal to rezone publicly owned industrial land that is also the last of the developable inner city waterfront, making it highly valuable real estate.
Former City of Burnaby senior planner Robert Renger made a freedom of information request last year about the Southeast False Creek site and recently received a largely redacted document from Vancouver’s real state services department. The city proposes making height and density changes to the Southeast False Creek official development plan of 2007 (amended in 2018), and then rezoning the area to allow residential and commercial uses. It’s the first step in the rezoning process for the area, which is about 10.8 hectares, or 24 acres.
Mr. Renger believes that such an important rezoning of public land should have more transparency, and it should have been made public by now.
“I don’t think it is, or should be, the natural order of things for establishing public policy for public lands,” he says. “Real estate services are not a private developer. Public consultation and discussion is warranted for such an important public development area.”
Anyone who walks regularly along the sea wall on the south side of False Creek between Olympic Village and Cambie Bridge will be familiar with the largely under-utilized mostly industrial site. The parcel falls within one of three defined pockets of the Southeast False Creek ODP, which planned early on for residential use.
The first of the three pockets of Southeast False Creek to be developed was Olympic Village. Properties to the east, around the rail yards, have also been developed under the ODP. Concert Properties negotiated a deal with the city to redevelop a large part of that neighbourhood with market housing and social housing.
All that remains is the work yards industrial land, also known as Area 1A, which includes police parking, a very large works yard on the sea wall, a couple of heritage industrial buildings, some temporary modular housing, a small nature island and Hinge Park. About 8.94 hectares can be improved upon, and 2.9 hectares developed, according to the document.
The plan is to rezone the work yards for retail and residential housing, with some units below market, some moderate rate market housing and mostly market strata or leasehold strata, depending on economic viability and council decisions. It’s unclear whether the idea is that it remains public land or is sold off. The part about the sizes of the projects allowed has been redacted, as well as transportation networks, view cones, massing, heights, floor area, and shadowing.
The acreage would be developed in phases, starting in the east and framing around Hinge Park and working westward.
The requested changes would impact height and density, allowing owner-occupied housing for first-time buyers. The document says that 19 storeys are possible within current view cones.
In an e-mail response the city said that the land is contaminated and needs remediation and is in need of considerable infrastructure improvements. The city has hired consultants to prepare for this work and staff are awaiting results of a study.
“If a rezoning application is submitted in regards to the land in Southeast False Creek Area 1A, details will be posted online and there will be a public open house[s], which would lead up to a public hearing about the rezoning. Council will provide direction on any terms of disposition and the future land tenure once a plan for redevelopment has been approved and potential costs and funding sources are fully understood,” said the e-mail.
Mr. Renger questions why the plan wasn’t revealed when the city staff’s controversial plan for False Creek South – the 1970s neighbourhood closer to Granville Island – was presented to the public. Council rejected that plan, which included a tripling of existing density, in October, 2021. The proposal to rezone the adjacent work yards parcel to the east was submitted a few days later, in early November, 2021.
Mr. Renger shared an e-mail from deputy city manager Armin Amrolia that said the rezoning application would take two years along with ODP amendments. Ms. Amrolia says that since the ODP was created in 2007 the city’s policies have adjusted to allow for more height and density in the area, and surrounding buildings have changed the urban context.
“I thought it was very strange when they started that public consultation about what should happen to city lands in False Creek South that they excluded that whole area,” says Mr. Renger. “And they had a plan for this land, but no one knew about it.”
Mr. Renger says he couldn’t understand why major density was being proposed for the existing community of False Creek South, when there was developable land next door that wouldn’t cause upheaval.
“Shouldn’t we be consulting about vacant land instead of developed land first?” he says.
Former City of Vancouver senior urban designer Scot Hein, who worked on the original ODP for Southeast False Creek, is concerned that the city might undo a lot of the planning and design work they’d done to keep mid-rise density. At that time, they planned dense mid-rise buildings for Southeast False Creek, with some minimal allowances, he says. That’s why Olympic Village is an award-winning mid-rise neighbourhood. They didn’t want a sea of towers, such as what exists on the north side of False Creek.
Several well-known names in land use policy circles signed a letter on April 6 2004 to Mayor Larry Campbell and council that argued against a “high-rise approach” for Southeast False Creek. Those names include Chuck Brook, who worked on the recent False Creek South plan update on behalf of the city, as well as high-profile architects Peter Busby and James Cheng, UBC professor Patrick Condon, developer Michael Geller, and others.
The city can either continue that vision, which included a mixed tenure of housing types, such as affordable rental, or go in the direction of a private developer, Mr. Hein says.
Many housing advocates would like to see publicly owned land used for social housing, more in line with the Vienna model, where the city owns considerable affordable housing. The Vancouver way is to sell off public lands to maximize values.
“It’s the last waterfront site in the inner city, and as much as we argue for complete community with mixed equal tenure, there’s another view that can’t be discounted that says it’s a taxpayer owned asset, so exploit the hell out of it – meaning, 100-per-cent market housing … with magical views,” Mr. Hein says.
“And then take the proceeds and build non-market housing somewhere else where the land is cheaper. I get that argument too. It’s not like it’s obvious what we should be doing.
“But if they want to change from the council-approved intention enshrined in the original official development plan, then there has to be a public process around that because it has implications about what will then happen with False Creek South and all the work from that community.”
The city maximized the value of its property further east when it consolidated city land with land already owned by Concert Properties, creating a 6.4-acre five-tower project called The Creek. It includes the 15-storey, 135-unit Railyard Housing Co-op. The project is a community land trust model and more than half the homes offer housing to households with incomes between $25,000 and $55,000. In exchange for extra density, the developer delivered the co-op, which remains public property. Concert then built 443 market strata units in four condo towers ranging from 12 to 17 storeys, with a city park.
At the Vancouver Real Estate Forum in April, Concert’s chief executive officer David Podmore interviewed B.C. Minister of Housing Ravi Kahlon, and they discussed “BC Builds,” an upcoming program that will likely use publicly owned land for new developments. Citing exorbitant land costs, Mr. Podmore had been pushing for this sort of collaboration for years.
Mr. Podmore said in an interview last month he’d prefer to see the city hang onto public land and sell leases instead, known as leasehold. In the early 1990s, his company entered into 80-year land leases on six city properties, delivering 970 rental units that they still manage today. Concert is owned by Canadian pension funds.
“The model that we did use in the early 90s, and we’ve used it occasionally on projects since that time, is leasehold interest in the land, and it can be 80 or 99 years. There are a lot of positive features for the government if it’s government owned land. But getting the land at an acceptable price on a long-term lease basis is very, very helpful.”
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