Shanghai Securities News have revealed that when record-high payments become due for China's real estate investment trusts (REITs) next year, there may not be the money available to pay back investors.
This comes as a crushing blow to an economy under pressure and indicates a possible crisis in the banking system as funds from the sale of REITs typically flow to weaker borrowers who would ordinarily struggle to obtain finance, particularly small property builders.
Trust products worth 203.5 billion yuan ($32.8bn) will enter maturity in 2014, doubling the annual volume according to Use Trust, a website specialising in the trust industry. If China are unable to may repayments to investors, the default would be the biggest ever in China's history.
Data from the China Trustee Association show that as of March 31, unpaid REIT amounted to 115 million yuan ($185mn) which represented 10.4% of all unpaid trust products.
Default to be Biggest Ever in China's History
"China's REIT default is unavoidable this or next year," said Yao Wei, economist at Société Générale's Hong Kong arm. He went on to say that the trust industry is at a turning point with huge imbalance in demand and supply.
With property prices spiralling in China, the demand for new homes has cooled as developers have continued to borrow at high levels. Lack of sales has place significant pressure on smaller developers with many expected to go bankrupt in coming months.
In March, Xingrun Real Estate Company, one of the biggest property developers in east China's Zheijiang province was on the brink of bankruptcy with debt of over 3.5 billion yuan ($565m).
Steps are being taken to crack down on off-balance-sheet lending or 'shadow banking' as it is known, which includes trust companies and wealth management products issued by banks.
Chinese Buyers Increasingly Looking Overseas
China's real estate market is also experiencing a migration of buyers to overseas destinations, principally Europe and the US. As people sell properties at the top of the market, they are reinvesting in countries that offer more value, preferring to rent their own residence in China while their money works more efficiently for them overseas.
In a report released last week by the National Association of Realtors (NAR), it was revealed that foreign purchases of US real estate surged in the 12 months ending in March to $92.2 billion, representing an increase of 35% over the prior period.
Chinese interest in Europe has also increased significantly with many investors being attracted to countries such as Spain and Portugal since the introduction of their respective 'Golden Visa' schemes which offer residency to non-EU property investors when they purchase a qualifying property in excess of €500,000.
Golden Visa Opportunities Particularly Attractive
In Spain, "the prime areas are Barcelona, as the city appeals to business people and resorts like Marbella" according to Christian de Meillac of Knight Frank. "What is also promising is that quite a few are buying above the minimum limit," he added.
Housing Starts 2012-2014
Chinese buyers are attracted by city and holiday property outside their own overpriced market, where they cannot hold land rights indefinitely, as a means to diversify their assets. They are also taking advantage of the yuan's strength against the euro, according to the Hispanic-Chinese Business Council.
It would appear that the misfortunes of the Chinese property market signal a renewed interest in property investment overseas, bringing much needed revenues to the slowly recovering markets of Europe.
- Monday 14 July 2014