Small Chinese property developers betting on ‘revenge spending’ could go bankrupt instead
- About 230 developers have already gone out of business this year, an increase of 10 per cent over last year
- ‘The risk of going bust is huge in the second half, as small developers are gambling’: Nomura
Shanghai-based Zhenro Properties plans to build up its land bank this year by acquiring plots during distress sales by smaller companies.
The top-tier developer believes underperforming smaller property companies will be forced to offload projects in the second half of the year, with some filing for bankruptcy, and will not buy all its land at expensive government auctions.
“About 20 per cent to 30 per cent of home builders will be gone [in the next couple of years]. Some will just exit the market, while others will go bust,” Kenny Chan, Zhenro’s chief financial officer, said. “This will be a good year for mergers and acquisitions – both at company level and at project level.”
About 230 property developers have already gone out of business this year, according to state-owned publication People’s Court Daily, an increase of 10 per cent over last year. More are expected to follow as smaller developers are wrongly betting on a recovery in mainland China’s housing market, observers said.
“The risk of going bust is huge in the second half, as small developers are gambling. They have actively been buying land at high prices these past two months, betting on the market staying hot. If the market turns sour in the coming months, they will face a liquidity crunch and the worst scenario for them will be bankruptcy,” said Leif Chang, head of China property research at Nomura.
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These companies have gone on a land buying binge since April. Land worth 360 billion yuan (US$50.9 billion) was sold in 100 major mainland Chinese cities last month, doubling the amount recorded in February and about 8 per cent higher than last year, according to Chinese data provider Wind.