Real Estate

China developers snap up distressed real estate debt


Property developers have found a new play on the Chinese market: buying up the soured debts of their rivals.

The property market is a linchpin of China’s economy. A slowdown in sales and falling prices in some large cities have sparked concerns of a deeper downturn if economic growth continues to stutter. Demand for homes, despite recent monetary policy easing, has been muted, according to research from UBS.

China’s economic slowdown has also resulted in record sales of bad debt, with Rmb1.75tn ($259bn) in non-performing loans sold off to distressed asset investors last year, the most in nearly two decades.

Within that mountain of debt, loans backed by property have become a hot commodity on the market for bad assets, often fetching prices far higher than loans that have other assets as collateral. Property developers are among the most indebted companies in China, with Rmb385bn in bonds set to mature in 2019.

The move by some of the country’s largest developers to scoop up the bad debts of peers in the industry is driving consolidation in the sector.

“When we buy up the distressed debt of [a] small developer, we are often taking over an entire small developer,” said Khoon Ng, chief executive of Paladin Asset Management, an investment group affiliated with Country Garden, China’s largest developer by sales. “This is something that is pushing consolidation much faster.”

Paladin, one of the country’s largest developer-affiliated distressed debt investors, recently launched a $1bn fund with property investor Gaw Capital, while also managing several other funds and employing about 280 people.

The company started buying distressed property debt about two years ago. It typically buys the problem loans for a large discount, revives the troubled project and then sells it on to Country Garden or another developer. “It’s another way for them to buy land but we do the dirty work for them,” said Mr Ng.

Others are following suit. In December, US private equity group Warburg Pincus said it would spend up to $5bn on distressed property debt in a partnership with Beijing-based conglomerate Hande Group, which has a large property development business.

China Vanke, another big developer, has teamed up with Industrial and Commercial Bank of China to launch a fund focused on distressed property debt.

This theme has become a strong driver for property sector consolidation. While prices for prime locations at land auctions remain high, such assets can be picked up on the cheap when smaller developers fail.

“In times of a slowdown, they tend to be in a good position to buy from small developers instead of going to the land market,” said Phillip Zhong, an analyst at Morningstar in Hong Kong.

There are still about 90,000 property development companies in China but the top 100 groups account for 67 per cent of total sales, said Mr Ng. He said the number of developers was set to fall considerably, and reckoned that within the next few years the 100 largest developers will control most of the market.

Yet Alaa Bushehri, head of emerging markets corporate debt at BNP Paribas Asset Management, noted that it takes time for larger developers to find smaller projects that match up with their business models. “We think consolidation is going to happen but it’s going to be slow,” she said.



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