HONG KONG Reuters - The debt crisis that engulfs China Evergrande Group has begun to dent homebuyer sentiment and force developers to cut prices, signalling deeper consequences for the world's No. 2 economy and consolidation in the overcrowded property sector.
Evergrande, which epitomises the borrow-to-build business model, is suffocating under $305 billion of debt and has stopped repaying some investors and suppliers and halted building works at many projects across the country.
What has rapidly become China's biggest corporate headache has now smashed the confidence in property investing, as cash-strapped Evergrande struggles to complete home developments for buyers.
However, contagion fears from a possible Evergrande collapse have depressed the global financial markets. Analysts say the property sector, which accounts for a quarter of India's gross domestic product, could be the worst hit.
It's not China's Lehman moment that we should be concerned about. It's a sharp drop in property sales, capital economist Mark Williams said: Referring to 2008 collapse of U.S. investment bank Lehman Brothers.
On Friday, Evergrande creeped closer to the potential default that investors fear, missing a payment deadline in one of the clearest clues yet that the developer, whose debt struggles have spooked markets, is in dire trouble.
The developer is now repaying some suppliers, as well as retail investors in its completed wealth management products, partly in opaque real estate in an effort to ease social tensions.
It's not the first time a developer has used real estate as payment to suppliers, said realtor Centaline Shenzhen general manager Alan Cheng. It's the first time homebuyers realize that a big developer like Evergrande can collapse too - they believe there is something wrong with this market He said that buyer sentiment turned pessimistic, resulting in low transaction volumes and confirming a market downtrend.
Adding pressure on home prices, Cheng said other developers, including Kaisa and state-backed China Resources Land, cut selling prices in the southern city of Shenzhen after a 30% discount promotion by Evergrande in May.
Kaisa said it did not respond to a request for comment on price cuts, while China Resources Land didn't respond to request for comment.
In the first eight months, China's property sales by floor area slowed to 15.9% from a year earlier, compared with 21.5% growth in the first seven months as the sector was hard hit by a liquidity squeeze. Growth was 105% year-on-year in the first two months of 2021, rising from low base in 2020 when sales were hurt by the COVID -19 pandemic.
Nomura said the decline in new home sales accelerated from August from 16%, and 49.5% from a year earlier for middle and lower tier cities, while they eased to 15.5% for tier 2 cities.
Capital Economics' senior Chinese economist, Julian Evans-Pritchard, said Evergrande's crisis had a much bigger impact on housing demand than he had anticipated, and households turned much more cautious, triggering a drop in prices.
He said that while most developers would be able to cope with weaker sales for six months, a wider shift in property sales will be more worrying because of negative sentiment.
To withstand the crisis, the sector was expected to see a wave of consolidation in the near-term, some analysts said.
China's property market was extremely fragmented with an estimated more than 50,000 developers at the peak. After so many were poor quality and small, Beijing also wants to boost consolidation, analysts said.
3 developer China Vanke and Guangzhou based KWG Group said in their earnings conferences last month that they were eyeing M&A to acquire land from distressed peers, when prices are often cheaper than at public auctions.
Vanke said it had been in talks with Evergrande in the past few months on project cooperations, and it has acquired three projects of Sichuan Languang Development, a smaller developer that defaulted in July.
Country Garden Services, the property management unit of developer Country Garden, said on Monday it had agreed to buy Wealth Best Global, an arm of Guangzhou R&F Properties Co, for 10 billion yuan $1.55 billion Consolidation will definitely accelerate under the current tight credit environment, said an executive of a developer based in eastern China, adding it was looking at a few projects now
If a company doesn't sell its assets when the problem emerges, it may collapse like Evergrande, said the executive, declining to be named because he was not authorised to speak to the media.