China’s third largest property developer, Evergrande Real Estate, has joined smaller peers in offering zero-interest downpayment loans, a practice reminiscent of the US housing boom that precipitated the global financial crisis.
The easy credit shows the gamble Chinese developers are willing to take to keep sales on track, but also highlights the risk of a broader industry correction if buyers default. So far such defaults have been rare in China, where household debt is low by Western standards and banks have traditionally required hefty deposits from buyers seeking mortgages.
Many analysts believe the slowing property sector poses the biggest risk to China’s economy in the second half of the year, despite a rebound in home sales in June as state-controlled banks offered more credit to support the market.
Guangzhou-based Evergrande, the country’s No 3 developer by sales, is offering downpayment loans of nearly a quarter of the purchase price to home-buyers for some of its projects.
Such loans skirt government rules that require a minimum deposit of 30% of a home price, while buyers who have put down as little as 6% upfront would find it easier to bail if the market turns.
“Buyers who can’t provide the 30% downpayment are generally low quality,” said Midland Realty chief operating officer Samuel Wong.
Data released alongside China’s second quarter GDP numbers on Wednesday showed real estate investment slowed in the first half and new property construction plunged. Private sector surveys published ahead of official housing data due on Friday showed new home prices fell in June for the third straight month.
Home sales surged 32.5% in June compared with May, although they were down 5.4% compared with a year ago, as state-controlled banks offered more credit to buyers to avert a sharper slowdown.
While some analysts are still worried about financing difficulties, sluggish sales and rising inventories, others believe a recovery in credit growth will improve property sales in the near-term.
“We think the improvement will continue until the end of the year, while starting into Q1 next year we’ll start to see another deceleration due to a strong base, so that’s the time when people will get worried again,” said Chen Long, China economist of Gavekal Dragonomics, based in Beijing.
In June, mortgage lending rose 6 percent from May to 117bn yuan ($18.86bn), official data showed, compared with monthly growth of 2.5% in May.
Credit promotions
One of Evergrande’s developments in eastern Jiangsu province’s Yancheng city accepts downpayments of as little as 6%, according to a project salesperson, while the company provides an interest-free loan on the remaining 24% to be repaid over 24 months.
Another Evergrande project in the central city of Xian was offering interest-free loans to cover up to 40% of the required deposit, repayable over three years.
Evergrande declined to comment when contacted by Reuters, and it was not clear how widely the company was offering such incentives.
Liao Qun, chief economist at Citic Bank International, said interest-free downpayment loans increased the risk of default, but added that the scale of such promotions remained small.
Such incentives are more often offered by small, cash-strapped developers on selected projects, and are unusual among larger developers in China.
“The property market is undergoing a correction so developers need to launch these kinds of promotions to push sales,” said Liao.
Showing the strain
While Evergrande recorded 69.3bn yuan ($11.16bn) of contracted sales in the first six months of this year, the third highest in China, the strain on its balance sheet is clear.
In particular, receivables - the accounting term for money owed by customers for goods or services already supplied - have been rising as the real estate sector has been squeezed by monetary tightening.
“Developers have seen their liquidity deteriorate as collections from presales have declined, because banks were not granting mortgage loans easily and developers had to provide instalment plans to attract buyers,” said Agnes Wong, a Nomura credit analyst in Hong Kong.
“This means collections have slowed further. In the past, collections were made within 1-2 months of the sale, but now it can be as much as a year with a collection plan, or 3-4 months with a bank mortgage.”