Analysis: Vanke woes to test limits of China's property sector revival efforts

Onewo

21/01/2025 10:23

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      Creditors, analysts expect Beijing to step in to stabilize
Vanke
    

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      Shenzhen government steps up meetings and coordination -
sources
    

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      State takeover to be first since property crisis started
in 2021
    

  
    By Clare Jim, Ziyi Tang and Kane Wu
       HONG KONG, Jan 21 (Reuters) - After numerous measures to
resolve a liquidity crisis in the property market in recent
years, Beijing is expected to end up dusting off an old playbook
and step in directly to stabilise a state-backed developer seen
as a bellwether for the sector.
    With the crisis in the sector entering its fifth year,
concerns about the financial health of China Vanke  000002.SZ 
pose fresh challenges for the authorities, who have so far
avoided the moral hazard of bailing out a debt-laden developer.
    Vanke's crisis came into focus last Thursday after a state
media report alleged that its CEO had been detained and that it
could be subject to a takeover or reorganisation. The report was
deleted within hours of its publication.
    Vanke, backed by state-owned shareholder Shenzhen Metro,
declined to comment on the media report.
    All three global rating agencies have downgraded the
developer deeper into junk since the media report, citing its
eroding financial flexibility and an uncertain sales outlook for
2025.
    Worries over Vanke's repayment ability intensified this
month amid looming debt maturity deadlines - its next yuan
repayment deadline is Jan. 27, while it has a total of $3.4
billion due this year.
    The government in the southern city of Shenzhen, where Vanke
is headquartered, is stepping up meetings and coordination with
local state enterprises on plans to contain the company's debt
risk and on asset disposals, said two people with knowledge of
the matter.
    Vanke, whose interest-bearing debt stood at 331.3 billion
yuan ($45.21 billion) as of the end of last June, is still
trying to sell stakes in logistics platform GLP, property
management unit Onewo  2602.HK , rental apartment businesses and
shopping malls, among others, said two separate people close to
the company.
    The sources declined to be named as they were not authorised
to speak to the media.
        Vanke declined to comment. The Shenzhen government and
Shenzhen Metro did not immediately respond to requests for
comment. 
        One of the best-known household names in China with many
projects across bigger cities, Vanke is around a third owned by
Shenzhen Metro. 
    It had previously been viewed as immune to the property
market turmoil which saw China Evergrande  3333.HK , the world's
most indebted developer with over $300 billion in liabilities,
ordered into liquidation last year following its offshore debt
default in late 2021.
    Analysts now express concern that Vanke's problems could be
the last straw for homebuyer confidence, which has shown signs
of stabilizing in the past few months, and that banks could
further shut financing to the sector, squeezing developers that
have not defaulted.  
    "Given Vanke's iconic status in the property market in
China, we think that the Shenzhen government should step in and
help to solve its liquidity issue and prevent further
deterioration of Vanke's financial situation," said Raymond
Cheng, head of China research at CGS International Securities
Hong Kong.
    
    BEST-CASE SCENARIO
    A full takeover of Vanke by the state, a possibility flagged
by some analysts, would be a first-of-its-kind move in the
world's second-largest economy since the property sector crisis
started in 2021.
    In the case of China Evergrande, the Guangdong provincial
government set up a risk management committee to manage the
fallout after the company said it might no longer be able to
meet its financial obligation. 
    Evergrande's founder was later detained and the developer
was subsequently ordered to be liquidated by a Hong Kong court.
    "Vanke is too important to the real estate industry ... if
it defaults it will ruin all the previous stabilization effort
by the central government, and the risk may spread to the
financial system," said a Vanke bondholder, declining to be
named.
    "Local government will for sure try its best to rescue
Vanke."
    Some analysts say a debt default is inevitable this year
without fresh liquidity support as Vanke battles plunging
monthly sales to below break-even levels and difficulties in
borrowing from banks and disposing off assets. It fell to fifth
by sales value last year from second in 2023.
    A Vanke creditor and a source close to the government in
Shenzhen said a state rescue was unlikely to result in pumping
in new capital, and analysts say a bailout could also involve
other state firms buying assets or ensuring funding access.
    A government intervention also could stem from the need to
ensure the completion of pre-sold homes, as Beijing in the
recent past has been ramping up efforts to bolster homebuyer
confidence, JPMorgan said in a research note on Jan. 16.
    A "clear government bailout" of Vanke would probably be the
best-case scenario and would demonstrate that "the government is
willing to put a floor under the property sector", said
Christopher Beddor, deputy China research director at Gavekal
Dragonomics.

 (Reporting by Clare Jim and Kane Wu in Hong Kong, Ziyi Tang in
Beijing; Editing by Sumeet Chatterjee and Susan Fenton)
 ((sumeet.chatterjee@thomsonreuters.com; +852 3462 7757;))