The property firm that could break China’s back
Land in Shenzhen, China’s southern technology hub, is scarce. Plots in years past have grabbed sky-high prices. But when Vanke, one of the country’s largest property firms, puts 19,000 square metres of land up for sale on May 18th, it will do so at a discount of 900m yuan ($125m), or 29%, on the price it paid seven years ago. The sale reeks of desperation. Vanke has been forced to flog its assets to pay its mounting debts. The company’s struggles are another sign of the worsening situation in China’s property industry.
Four years into the crisis, the potential collapse of another Chinese real-estate giant may seem unremarkable. Evergrande, the world’s most indebted homebuilder, fell in 2021. Country Garden, once China’s biggest developer, followed suit in 2023. Yet Vanke is different. Shenzhen Metro, a state-owned firm, holds about a quarter of its shares. This has given it greater access to state funds than its purely private peers. Late last year it was also included on a list of “high-quality” developers to which the government encouraged bank lending. And still the firm is short on funds to pay down debts.
Thus investors are hyper-focused on Vanke and its attempt to come up with the cash. The company lost 1.7bn yuan in the first quarter of 2024, as its sales fell year over year by 43%. It owes 320bn yuan, with about 31bn yuan in public bonds that are due to mature over the coming year. If the company defaults, trust in all state-backed developers, which until now have weathered the crisis better than their private peers, would be under threat. As such, investors worry a default at Vanke could “break China’s back”, note analysts at Jefferies, an investment bank, prompting confidence in the state itself to evaporate.
Moreover, swiftly falling land-reserve prices are perhaps an even bigger reason for Chinese policymakers to worry. The starting auction price for Vanke’s sale in Shenzhen is set at 2.2bn yuan, whereas the company bought the land at 3.1bn yuan in 2017. Reserve prices vary between districts and cities. But the fact that the price of land in a top-tier location has fallen significantly below relatively recent levels comes as a shock—not least because ever-increasing reserve prices have formed something of a backbone for Chinese real estate.
Big property developers hold around 2bn square metres in land reserves, according to ANZ, a bank. This does not include land held by unlisted companies, which do not disclose such information but hold an abundance in smaller cities. Until recently the value of these empty lots rose each year, bolstering the asset values of companies involved. Indeed, developers often held on to the parcels for years as land prices shot up. They would then use the increasingly valuable land as collateral for loans, which they used to buy still more land.
The government was wise to halt this potentially infinite increase in leverage in 2020, when it limited the debt companies were allowed to take on relative to their assets. Yet China’s leaders have never been able to gain full control over the property crisis. When land prices stopped rising in 2021, banks began to question the true value of reserves claimed as collateral. As reduced amounts of leverage were pumped into the system, less land could be bought by developers, which caused prices to deflate and set in process a downward cycle from which the country has struggled to escape. It is difficult to assess just how bad things have got, because most reserves are still tightly held by developers, who are hoping for a rebound in prices. Only in rare instances, such as Vanke’s, do outsiders get a glimpse at the carnage. ■
Correction (May 20th 2024): This article previously incorrectly stated that land reserves held by big property developers covered an area the size of Slovenia. Sorry.
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