Deepening Crisis in China’s Property Sector As Developers’ Debt Woes Escalate; Another Chinese Real Estate Firm Files For Bankruptcy

Sunac, one of China’s prominent property developers, has sought bankruptcy protection in the United States after securing approval from its creditors to restructure nearly $10 billion of debt. 

This move follows a similar filing by Evergrande, another distressed Chinese developer, a month ago, which posted losses of $81 billion in the last two years.

Sunac has filed a Chapter 15 petition with the US Bankruptcy Court for the Southern District of New York. Chapter 15 is designed to facilitate cooperation between US courts, debtors, and other involved jurisdictions in cross-border bankruptcy cases.

This bankruptcy process could aid Sunac in negotiations with overseas lenders as it works on its debt overhaul. The company recently announced it had obtained approval from over 2,000 creditors to restructure $9.9 billion in debt and interest payments owed to international investors, as reported in a filing on the Hong Kong stock exchange.

While Sunac was China’s 10th largest property developer in August by contracted sales, it dropped to the third position before its default in 2022; however, successfully negotiating with overseas creditors could set a precedent for other distressed developers seeking recovery.

According to Sandra Chow, co-head of Asia Pacific research at CreditSights, Sunac is the first major Chinese property developer to achieve such approval. Previously, smaller developers had reached similar agreements involving smaller amounts of money. In contrast, Evergrande is struggling to gain approval from offshore creditors due to less favorable terms it has offered.

Following the news of its US bankruptcy filing, Sunac’s shares in Hong Kong closed 4.3% lower, reversing earlier gains. 

Like many other Chinese real estate developers, Sunac has faced a severe cash crunch, with a 50% sales decline in 2022 compared to the previous year; its total liabilities reached a staggering 1 trillion yuan ($137.6 billion) by the end of the last year.

Despite recent efforts by Chinese policymakers to support the struggling industry, concerns remain about how policy support will impact sales and the overall business outlook for these developers; Country Garden, once China’s largest homebuilder, is also on the brink of default, adding to the sector’s woes.

First Evergrande, Sunac And Now Sino Ocean

Meanwhile, Sino Ocean, another major Chinese real estate firm, has worsened the ongoing turmoil in the troubled property sector by suspending payments on its offshore debt. 

Sino Ocean, which claims a place among the top 20 real estate developers in China, announced on Friday, via a stock exchange filing, that it would temporarily cease payments on its US dollar-denominated bonds and halt their trading as part of a broader debt restructuring effort.

The company cited mounting liquidity pressures stemming from a sales downturn in the real estate industry since 2021, which has impeded its ability to meet its debt obligations. 

This year has witnessed a rapid decline in contracted sales and increased uncertainty surrounding asset disposals for the company.

Sino Ocean, headquartered in Beijing, specialises in residential and commercial development and boasts a portfolio of approximately 600 projects spanning more than 80 cities in China, encompassing high-end office buildings and shopping centers.

The company, along with its financial and legal advisors, Houlihan Loukey and Sidley Austin, has not yet provided:

• Details on the duration of the restructuring process.
• Potential impacts on onshore debt payments.
• Any legal ramifications.

After the announcement, Sino Ocean’s shares plummeted 10.6% in Hong Kong, trading at just 59 Hong Kong cents (about 8 US cents).

As of June, the company’s total current liabilities, including debt maturing within a year, had reached nearly 60 billion yuan (approximately $8.4 billion), according to its interim annual report.

This news further compounds concerns about China’s property sector, which has recently gained increased attention as Country Garden, the nation’s largest homebuilder in the previous year, teeters on the verge of default. 

Data from the National Bureau of Statistics revealed that property investment in China fell by 8.8% during the first eight months of the year compared to the same period in the previous year, and property sales, measured by floor area, dropped by 7.1% from January to August, compared to the corresponding period in 2022.

Moody’s recently downgraded its outlook for the overall sector, citing declining residential sales and persistent concerns about the industry’s health. 

In June and July, property sales nationwide declined by approximately 20% compared to the same period in the previous year, reversing the 11.9% growth observed during the first five months and highlighting renewed weakness in the residential property segment.

Moody’s also downgraded the credit ratings of another Chinese real estate developer, China SCE Group, to junk status, citing significant debt and cash flow issues. The group’s ratings were downgraded from B3 to Caa1.

The Last Bit, The deepening crisis in China’s property sector, marked by the suspension of offshore debt payments by major developers like Sino Ocean and bankruptcy filing by first Evergrande, now Sunac, sends distress signals throughout the industry. 

As sales continue to plummet and liquidity concerns mount, the potential for further defaults looms large; the consequences of these challenges are not confined to the property sector alone but have far-reaching implications for the broader Chinese economy.

The Chinese government’s efforts to stabilise the real estate market and support developers appear to be insufficient, as the root causes of the crisis persist. 

The future of the property sector remains uncertain; with the potential for more defaults and market disruptions, it becomes evident that the fate of China’s real estate industry will profoundly impact the country’s economic stability and growth prospects in the years to come.