Homebuyers in China refuse to repay loans as developers push back delivery dates

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(Yicai Global) July 14 — A growing number of early buyers of residential projects under development in China are refusing to pay off their mortgages as a tight financing environment and slow sales mean many developers struggle to finish construction on time.

Buyers of about 150 housing projects in 20 provincial-level regions have banded together to demand that developers restart construction and deliver houses within a reasonable time, otherwise they will all stop repaying bank loans, Yicai learned. Overall. If that happened, it would be another blow to real estate companies already on the brink.

Many of these projects are carried out by defaulters such as China Evergrande Group, Yango Group, Tahoe Investment Group, Sunac China and Kaisa. Most are in smaller third- and fourth-tier cities, but some in larger first- and second-tier cities have also been arrested.

About 500 million square meters of properties under development have now suspended construction, according to GF Securities. Based on an average price of 10,000 CNY (1,488 USD) per square meter, this represents 5 trillion CNY (742 billion USD) of properties. And, calculated on an average down payment of 60%, that implies mortgages of around 2 trillion yuan.

Financing difficulties and slow sales are the main reasons for the halt in construction, said an employee of a property company in northern China.

Lax oversight

Presales are an important way to fund real estate projects, another industry insider said. But very often, the revenues from presales are diverted by the developer. When there are no new inflows, the funds quickly run out, causing the project to stop. So even though some projects are resuming construction under pressure, progress is slow.

Due to the loose supervision of presale funds by local governments and banks, the developer could use the money for the construction of other projects, to repay loans or even to buy more land use rights, said a real estate insider. With tighter oversight, that wouldn’t happen.

Some homebuyers in Zhengzhou, central Henan province, for example, did not receive their new homes by the agreed date. They then discovered that the developer had squandered 2.6 billion CNY (390 million USD) from the project account. On June 30, they declared that they would no longer pay their mortgages.

big shot

“Homebuyers are not legally advised to stop repaying their loans,” said Zhang Bo, a partner at law firm Beijing Yunjia. “They are likely to be sued by banks for breach of contract, which will also affect their credit records.”

And this will have a severe impact on the real estate sector. “The market has just picked up a bit, but the refusal to repay loans on unfinished properties will be a major blow to market confidence, which is already fragile,” said a market insider.

“Many developers are faced with the difficult choice of using their remaining funds to pay down debt or spending them on building existing projects to ensure on-time delivery,” said another eastern property company. country.

“Our company is focused on increasing its revenue sources and reducing costs,” said a staff member of a developer in Henan province. “Specific measures include expanding financing, selling off project equity, revitalizing assets and accelerating destocking. Only by keeping the business going will we be able to gradually deliver the projects. “, he added.

Publishers: Tang Shihua, Kim Taylor

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