Kaisa Default Highlights Chinese Housing Financing Risks
If there was ever any doubt regarding the soft underbelly of the Chinese real estate market, look at Kaisa Group Holdings. This real estate developer has missed its payments to a trust finance company. This is hardly a small issue. This is not just a case of a formerly high-flying real estate company missing interest payments to a lender. A lot of China finance market and real estate market observers are looking closely at the Kaisa situation.
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The company that lent financing to Kaisa is an investment trust. All told, builders like Kaisa are on the hook for 241 billion Yuan to trusts. This is up dramatically from the 178 billion Yuan owed to trusts last year. Kaisa owed an investment trust 2.5 billion Yuan in bond coupon payments. This missed payment is going to negatively impact financing for Chinese real estate developers.
They are caught between a rock and a hard place. On one hand, they can’t lower their prices because prices are already slumping. On the other hand, they are under extreme pressure to sell as many units as possible, because of their debt obligations. Gone are the golden years of increasing real estate value. Increasingly, developers are getting caught in a crunch. Worse, as trust financing dries up, this may translate to a credit crunch that might spread throughout the general Chinese economy.
China’s GDP growth is already showing signs of cooling. In fact, China’s economy grew at the slowest rate in over 20 years. Things are definitely not looking up, as far as China is concerned. A possible state intervention might kick in, to prevent an implosion in the local real estate market.