As China’s private developers retreat, state-backed rivals gain

Have developers supported by central or local governments dominated land auction nationwide in recent months, thanks to their continued access to affordable financing. While they are also battling a decline in apartment sales and falling home pricesThe decline in their sales has generally been less severe than that of their peers backed by the state.

“In the next year or two, we will see an accelerated process of private real estate developers being pushed out. Their space will only continue to be squeezed,” said Professor Zhiwu Chen, chair of finance at the University of Hong Kong.

Some investors believe that state-backed companies are better positioned to weather the slowdown in the industry. Howe Chung Wan, head of Asian Fixed Income, said, “The ones that are left are going to be mostly financially sound developers, who are associated with state-owned enterprises, because these are the companies the government wants to see succeed. ”

Principal Global Investor

in Singapore.

He said that not all state-backed companies will perform well. Last week, bonds of Greenland Holding Group Company, which counts the Shanghai government as a major shareholder, fell to levels indicating an extremely high probability of default. The company on Friday said it is seeking to extend the maturity of the $488 million dollar bond after the city was hit by the COVID-19 outbreak and lockdown.

In recent years, Beijing has tightened private sector controls to bring key industries in line with state goals. lies in the trick Chinese leaders mistrust the country’s entrepreneurs and their rapidly growing business. Officials have criticized the “disorganized expansion” of capital and regulatory crackdowns targeting Internet-technology platforms, after-school tuition companies and other sectors dominated by private enterprises.

The real-estate industry—which has grown massively over the past decade and is also dominated by private players—has been hit by restrictions such as the “three red lines” August 2020 policy, which sets strict limits on developers’ borrowings. Is. This stymied the rapid expansion of Evergrande and other developers, who were aggressively piled on debt and profiting from ever-increasing home prices. Officials have reiterated the official position that housing is for living and not speculation, indicating they want a stable housing market.

Since the recession last summer, Beijing has been encouraging state-owned developers to take a more active role in the sector.

Regulators issued a directive in December that encouraged healthy developers to take good assets from their distressed private peers. Officials have also asked financial institutions to support such acquisitions with debt and bond financing.

State-owned enterprises including China Merchant Shekou Industrial Zone Holdings Co. and

China Resource Land Ltd.

are among developers who have received financing for mergers and acquisitions or issued bonds. The total amount raised so far has been quite modest, amounting to about $520 million, official data from China’s largest bond market showed.

State developers “have only a small presence within the industry, and are constrained by how much support they can provide for the entire sector,” Rhodium Group analysts Alan Fang and Logan Wright said in a report earlier this year. He estimated that state-owned developers represent about 15% to 25% of China’s entire property industry by sale.

Instead of trying to protect their private competitors, state-backed developers could benefit “from the fire sale of quality properties” to capitalize on the broader industry’s woes, Rhodium analysts said.

Evergrande and Fantasia Holdings Group Co., which also defaulted on dollar debt, are among private developers that recently sold stakes in some unfinished residential or commercial property developments to state-owned entities, according to regulatory filings. according.

In Guangzhou, where Evergrande is located, the city’s first land auction this year took place in May. Of the 18 land parcels sold, some 15 went to local governments or central government-owned companies. Four went to Guangzhou Metro, a subway operator that also has a property development business.

In contrast, with a heated land auction in the same city two years ago, when 10 of the 11 parcels sold went to private developers, including Evergrande—and its now-defaulting partners Casa Group and China Aoyuan Group. The only winning bidder from that 2020 sale was also participating in this month’s auction

uixiu property Co.

Controlled by Guangzhou Government.

Yuexiu, which was founded in 1983, reported its highest ever contracted sales last year and acquired 37 new land parcels in 18 cities, according to a Hong Kong stock-exchange filing. The company’s shares are up 23% this year, while most of its private counterparts have declined.

Overall, developers’ land purchases declined sharply, down 46.5% in the first four months of 2022 from the area a year ago, according to the National Bureau of Statistics.

According to data tracked by Chinese property search engine zhuge.com, all except eight of the top 20 developers who participated in land auctions in those four months are state-backed.

Country Garden Holdings Co.

Top participant in the last two years, is out of top 20,

China’s biggest developers still have enough land to sustain apartment sales for at least three years, according to Xie Yangchun, an analyst at industry-data provider, CRIC. But if the slowdown continues and state-affiliated developers continue to make up the bulk of land-auction purchases, it will point to a future of more home sales by government-backed firms.

“Anyone who can survive this consolidation will thrive within a smaller market in the future,” Mr Fang of Rhodium said in a May report.

—Rebecca Fang and Serena Ng contributed to this article.

write to cao li at li.cao@wsj.com