Real Estate

A Shakeout Looms for China's Homebuilders


Unfinished houses at Zhejiang Xingrun’s development in Fenghua

Photograph by Gregory Turk/Bloomberg

Unfinished houses at Zhejiang Xingrun’s development in Fenghua

Amid a cluster of half-built brick townhouses surrounded by peach groves on the outskirts of Fenghua city, workers could be seen taking down metal scaffolding and hauling away steel plates last month. They had heard that Zhejiang Xingrun Real Estate, the company building the housing development called Peach Blossom Palace, was insolvent. “The developer owed us hundreds of thousands of yuan” for scaffolding and steel, said workers Xie and Wang, who would only give their surnames. “We are taking these materials back for now because there’s no work here.”

The collapse of Zhejiang Xingrun may signal the start of a shakeout among the nation’s almost 90,000 real estate companies. After China began allowing private homeownership in 1998, homebuilders binged on easy credit from banks and other lenders. Now many developers are struggling with debt as thousands of apartment buildings across the country sit empty and the government makes it harder to borrow. CBRE Global Investors says there are about 30,000 developers after small construction companies and those formed for only one project are eliminated. “That is far too many, even for a country as large as China,” says Richard van den Berg, country manager for China at CBRE. “Consolidation needs to take place.”

Home prices in China have climbed 60 percent since 2008, when the government began a 4 trillion yuan ($645 billion) stimulus program to counter the effects of the global financial crisis. Former Premier Wen Jiabao began trying to cool the property market in 2010, imposing higher down-payment requirements, raising interest rates on loans for second-home purchases, and increasing construction of low-cost housing. Li Keqiang, who succeeded Wen in March 2013, further tightened credit in June, in part by cracking down on nonbank lenders.

About 67 percent of housing under construction in China last year was in less affluent cities such as Fenghua, according to Nomura Holdings (NMR). About 120 miles south of Shanghai, with a population of 500,000, Fenghua is best known as the birthplace of former Chinese nationalist leader Chiang Kai-shek. The city is filled with pawn shops, textile and garment factories, and empty residential buildings.

Zhejiang Xingrun, the biggest developer in Fenghua, owes 2.4 billion yuan to banks, 700 million yuan to private lenders, and 400 million yuan to construction companies, according to Xu Mengting, director of the news office at the Fenghua city government. The company hasn’t declared bankruptcy, and the local government is holding discussions with commercial banks about the company’s debts, Xu says.

Authorities have detained Shen Caixing, who founded Zhejiang Xingrun 14 years ago, and his son Shen Mingchong for raising money illegally, according to Xu. Neither Shen nor his son could be reached for comment. Wu Xijuan, a property agent at Tengfei real estate agency in Fenghua, says Shen was a celebrity. “Everybody called him ‘Cement Shen,’ because he started out with a renovation and cement business,” Wu says.

Zhejiang Xingrun was one of the first companies in the property business in Fenghua “with no previous experience or professional sales teams,” says Zhong Yongjin, a researcher at Centaline Property Agency, China’s biggest real estate brokerage. “But these local developers usually don’t have risk controls,” he says, and they don’t respond well to changes in market conditions. Xu, who says the main reason the developer is insolvent is that it “wasn’t run well,” adds that “fluctuation of land prices also played a role.”

With lending tight, more developers such as Zhejiang Xingrun will go under, says Johnson Hu, a property analyst at CIMB Securities Research (CIMB:MK). Premier Li “has already signaled that as long as there are no systematic regional risks, the government won’t do much because some cases of default are inevitable,” Hu says.

While real estate companies may founder, the property market isn’t in danger of collapsing, according to Andy Rothman, an investment strategist with money manager Matthews Asia. He doesn’t see signs of a property bubble partly because urban income growth in China has outstripped the rise in home prices in the past eight years. Also, Chinese buyers pay for homes either in cash or with significant down payments. “Is this the tip of the iceberg or a signal that there are serious problems in the Chinese real estate market? That seems highly unlikely,” Rothman says. What has changed is that the Chinese government is more willing to let private companies fail, and “that is a good thing,” he says. “If you are going to have creative destruction, some companies are going to have to go out of business.”

The bottom line: Tighter credit and homeownership restrictions could lead to defaults among China’s 90,000 developers.


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  • NMR
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  • CIMB:MK
    (CIMB Group Holdings Bhd)
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