As e-commerce gains popularity in China, people buy everything online, even distressed real estate
- Global funds are searching out distressed property sales in the world’s largest bad-debt market
From a three-story villa in Chongqing to a rundown factory in Jiangsu province, you can search, find, and buy it without leaving your living room in China.
Online distressed property sales are booming in the world’s largest bad-debt market. Global funds like Oaktree Capital Group LLC and Bain Capital LP are getting in on the action but the internet has meant even individuals or smaller companies can snag a bargain. Banks, real estate firms and people saddled with debt they can’t service are facing either forced sales or are keen to offload assets for quick cash.
Distressed property listings on Alibaba Group Holding Taobao auction site, the country’s largest, rose 88 per cent in October from a year earlier as the company expanded its offerings by working with courts and asset managers. Across all auction sites in China, distressed real estate listings surged to a record 1.3 trillion yuan (US$190 billion) this year, data compiled by property agent Seatune show.
“With bad loans rising and property prices falling, be assured this trend will continue,” said James Feng, the chairman of Poseidon Capital Group, a Chinese fund that specialises in buying distressed assets.
Alibaba, which started its auction site about six years ago, facilitated around 500 billion yuan of such auctions last year, accounting for more than half of China’s total, Feng estimates.
Getting a bargain is one of the main reasons people buy property online. A two-bedroom flat in downtown Shanghai worth about 10 million yuan at current market prices went for a 44 per cent discount on Taobao in September. In Hangzhou, a city in eastern Zhejiang province, a 60 million yuan unit with marble floors, sweeping staircases and chandeliers is listed on Taobao for around 40 per cent less than current prices.
Distressed property – be it homes, which individuals are more interested in, or land or warehouses, which companies like – is typically offered at about two-thirds of its market value. Heated bidding can see prices pushed up to about 90 per cent of that, according to Zhejiang Province Zheshang Asset Management Co., although only about 40 per cent of listings actually sell.
Still, the opportunities are expected to keep coming, with bad loans tied to property increasing. Real estate underpins China’s US$1.4 trillion non-performing loan market, accounting for as much as 80 per cent of debt in portfolios sold, PricewaterhouseCoopers LLP said in a report last month.
To bid, prospective buyers have to deposit funds in advance. Alibaba does not take a commission, and can also facilitate third-party services, such as due diligence from a law firm. Local courts can also help getting photos of a property, including its address, size and estimated market value.
Buying a home online is of particular interest to individuals wishing to circumnavigate austerity measures in China’s bigger cities that cap the number of properties a person can own. Shanghai is the only tier-one centre that currently excludes distressed real estate transactions from home-buying restrictions, and has witnessed some of the most online sales, Seatune Chief Executive Officer Liu Yanmeng said.
But such transactions aren’t without risk.
Some buyers have bought distressed property online only to realise significant taxation costs weren’t listed on the site. One man in Shenzhen bought a home in March for 3.7 million yuan and later discovered an additional 2.4 million yuan owing in value-added taxes, local media reported at the time.
Alibaba said in an emailed statement that its website “includes clear auction procedures and specific deposit requirements to ensure transparency of the sale.”
“Buyers should conduct due diligence on the real estate itself to understand the situation,” said Yao Kunlun, a China advisory business director at PricewaterhouseCoopers. “As pressure to resolve non-performing loans rises, more and more real estate collateral will be put up for sale.”