Chinese property developer companies are taking big losses. In a start signal that the sector’s correction period is far from over, Caixin Global has projected more than RMB 240 billion (about US $34 billion) in losses. This is not a shock. These numbers follow several years of industry stress, but it does raise the question of how long this can continue.
Let’s break down the numbers. Over 80% of projected losses sit with the ten worst-hit developers. Of those developers, Vanke (万科) leads the list, forecasting a record net loss of around RMB 82 billion (about US$11.7 billion). Other major loss-makers include China Fortune Land Development (华夏幸福), Greenland Holdings (绿地控股), Overseas Chinese Town (华侨城), and Gemdale (金地集团). What we’re seeing is that these large, formerly stable players are absorbing much of the damage.
It’s not all bad news. There is still profit in places, but the firms that do profit are a definite minority. It’s also worth noting that where companies do profit, those profits largely come from asset disposals, debt restructuring, or accounting adjustments. Core real estate sales remain weak.
Chinese property developer losses: the how and the why
So what does this say about China’s property reset? All signs point to this downturn being structural, not cyclical. Policy changes have slowed the collapse but confidence in the sector could hardly be called soaring.
Much of this is down to excess supply in the wrong places. As China’s construction market boomed, houses were thrown up aggressively, and often speculatively. This isn’t a huge problem in big cities where demand for housing is high, but in lower-tier cities or rural areas, those speculation builds become cash tied up in assets – assets without demand.
House prices fall due to low demand, which makes waiting to buy a rational decision. And so property developers are stuck. Often, looking for ways to free up their cash, they’ll sell up at a loss. The era of growth-by-default is over, and the balance sheets show it.
