Chinese property development in Wuhan cityscape
Source: Getty Images

Evergrande’s Mountainous Struggle Won’t End Well

By

Sep. 16 2021, Published 10:34 a.m. ET

Historically, the Chinese government hasn't been the world's most forgiving. As property developer The Evergrande Group (OTC:EGRNF) and its many subsidiaries face a massive collection of debt, its future is in question.

Article continues below advertisement

Meanwhile, the entire Chinese property sector is suffering the brunt of Evergrande's push-and-pull tactics of acquiring beyond its means. However, the sector's other participants aren't innocent, either.

How Evergrande got here

evergrande
Source: Getty Images

Xu Jiayin, standing committee member of the 12th CPPCC National Committee and chairman of the board of Evergrande

Evergrande has been on a mission to grow rapidly, no matter the cost. Now, the property developer owes at least $305 billion, a seemingly insurmountable debt that the Chinese government is seeking to take control of.

Article continues below advertisement

In addition to that debt, Evergrande holds $7.4 billion in bonds that are due in 2022. Meanwhile, bondholders will likely lose 75 percent of their investment. The company has now been saddled with multiple credit downgrades.

A ripple effect: How Evergrande is impacting the entire Chinese property sector

At first glance, Evergrande's debt seems wildly high—but the reality is that the Chinese property development sector is riddled with instances of excessive borrowing.

Article continues below advertisement

That's why the city of Beijing decided in Aug. 2020 to look more closely at the sector's total debt. Property developers have since been forced to liquidate by selling properties discounted by up to 25 percent. Meanwhile, many housing projects have been stalled as developers await regulatory changes. In reality, 1.5 million unfinished investor-fueled properties could swallow up those downpayments.

Evergrande may have been the straw that broke regulators' back, but the sector as a whole has been living well beyond its means for a long time. Property investors wonder if they'll get their money back at all, let alone see a return.

Article continues below advertisement

It's not just developers taking the brunt, either. Adjacent entities, such as property management companies, have also experienced a downturn in capital after years of flourishing growth.

Evergrande awaits the Chinese government's next move

As Chinese regulators work to quell the once-frenzied property sector, developers feel stalled. Evergrande hopes to come to an agreement with the government to reorganize its debt, but so far, there's been a lack of assistance. In the meantime, Evergrande has hired financial advisors in the hopes of restructuring the debt.

Article continues below advertisement

Investors aren't staying around to find out

Evergrande's Hong Kong stock is dwindling, too. The exchange paused trading for the stock after it fell 27.35 percent in a week. In the past six months, the stock has decreased by a whopping 82.54 percent.

Despite Evergrande's involvement in other sectors (including food, life insurance, and even sports), its difficulties stem from the property space. The Lippo Select, a 52-stock index composed primarily of real-estate companies in mainland China, has fallen 23 percent year-to-date.

At the end of the day, there's no guarantee that Evergrande will make it out of this fight alive. Its market cap has been decapitated, its profits shrunken, and it owes much more than it can pay off. Oftentimes, selling hard and fast—despite the crushing losses—is a more valiant choice than remaining loyal in hopes of an upswing, though it's also a lot easier said than done.

Advertisement

More From Market Realist

    • CONNECT with Market Realist
    • Link to Facebook
    • Link to Twitter
    • Link to Instagram
    • Link to Email Subscribe
    Market Realist Logo
    Do Not Sell My Personal Information

    © Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.