Real Estate

Evergrande: failed asset sales bring formal default closer

You know things are bad when a company resorts to fire sales but even rock bottom prices do not attract buyers. Evergrande, the world’s most-indebted property developer, is running out of time. The grace period on its first batch of unpaid offshore bonds ends this week. A formal default would hurt the property sector and help some others.

The Chinese property developer has been trying to sell a majority stake in its property management division. The expected proceeds of $2.6bn are badly needed. Missed debt payments are piling up.

But the sale of shares in Evergrande Property Services has fallen through. Government officials brokering the deal were unable to calm buyer nerves. Evergrande is also reported to have failed to find a purchaser for its Hong Kong headquarters.

Shares in the group fell 13 per cent to HK$2.58 ($0.33) on Thursday as trading resumed after a three-week halt.

Contracted property sales for the month to Wednesday dropped 97 per cent. Shares in an electric car unit are down 90 per cent this year. Evergrande is inching towards a formal default.

If one is declared and liquidation would bring more value to creditors than a turnround attempt, the biggest impact would be on property prices in places where Evergrande is active. The group has a large portfolio of properties spanning more than 560m square metres. This includes over 1m unfinished homes. Potentially these would all be put up for sale at once.

Chinese output is strong. But growth in the property and construction industries turned negative in the third quarter, according to official statistics. Property sales by floor area fell 16 per cent in September. New construction starts fell 14 per cent in September.

A deeper property slowdown could help margins of other sectors hit by surging raw material prices. Demand for iron ore, steel and cement should fall. This would be a boon to manufacturers of cars, domestic appliances and any business burdened with high construction costs. The risk to them of financial contagion from real estate meltdown remains low.

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