Evergrande, China ghost cities


Evergrande, China ghost cities

China has 65 million empty homes, enough to accommodate the entire population of France. The "ghost town" crisis. China has 65 million empty homes, enough to accommodate the entire population of France...

Evergrande: Ghost town crisis of China

Evergrande China ghost cities
Evergrande China ghost cities

Evergrande Once the best-selling key developers in China:

Evergrande, the $ 300 billion Chinese real estate colossus that could trigger a new global financial crisis, can house the entire population of Hungary or Greece in its blocks of flats, Business Insider writes.

If you drive an hour or two outside the metropolises of Beijing or Shanghai, you can find new, tall and modern cities that are practically empty.

One in five apartments in China is not occupied. It is about at least 65 million units, which would be enough to shelter the entire population of France, writes the quoted publication.

The Chinese city of Guiyang:

Evergrande China ghost cities
Evergrande China ghost cities

But this is not a new problem. The American television station CBS reported since 2013 the existence of these ghost towns.

Chinese property developer Evergrande reportedly paid interest on offshore bonds before the grace period expired on Friday, narrowly preventing a catastrophic default for the second time in a week.

The Chinese real estate market has once again entered international radars due to the $ 300 billion debt of the real estate giant Evergrande.

In an editorial published in the Financial Times in late August, financier George Soros warned that the collapse of Evergrande could lead to an economic crisis in China.

Ghost towns crisis: vacant accommodations

Li Gan is a professor of economics at Texas A&M University and director of the Household Finance Research and Survey Center at Southwestern University of Economics and Finance in the Chinese city of Chengdu. He is considered one of the top experts on the Chinese real estate market.

When Business Insider asked him how many ghost towns there are in China, he had no answer. "I don't know if there's a definition for a 'ghost town.' So, I don't know if there is a number, "he said.

The best example of such a definition is the city of Ordos, in the Inner Mongolia region. In the 2000s, a new neighborhood was built here that should have housed a million people. In 2016, however, only 100,000 people lived here.

Ordos later managed to attract more residents after China moved some of its top schools to the city, according to the Japanese newspaper Nikkei.

$ 52 Trillion real estate market:

Such unoccupied units make up a significant portion of the Chinese real estate market, which is twice the size of the US residential market. In 2019, its value reached 52 trillion dollars, or 52 trillion.

The latest data published by the Household Finance Survey, conducted by Professor Li Gan, show that 21% of homes, or 65 million, were vacant in 2017, according to the Wall Street Journal.

But unlike the US and Japan, where the decay of certain cities or regions has led them to be called ghost towns, in China the situation is different. They are not abandoned but are unoccupied.

This is a "unique phenomenon, specific to China," according to Gan. There are cities where a lot of apartments are bought as investments. "The fact that these houses are empty means that they are sold to investors or buyers, but they are not occupied by either the owner or the tenant," says Xin Sun, a senior lecturer at Kings College London, specializing in Chinese and East Asian economics. Every year, China builds 15 million new homes, five times more than the United States and Europe combined, The Economist wrote in January.

20% of Chinese have more homes:

Evergrande China ghost cities
Evergrande China ghost cities

The general trend has been a rise in house prices, caused by a massive increase in demand, especially for second or third property, according to Sun.

He says most Chinese have not experienced a real estate crisis, as happened in Japan in the 1990s or in 2008 in the United States. "This leads to a strong popular belief that real estate is the best way to preserve and generate wealth," says Sun. And this has led to stimulating demand for new housing.

Property is in vogue in China:

More than 90% of occupied homes are owned by homeowners, according to a January study. More than 20% of homeowners own more than one home. In the US, by comparison, there is only a 65% ownership rate.

Evergrande can host all of Hungary in its apartments of flats. Evergrande has more than 1,300 projects spread across 280 cities in China, with a living capacity of 12 million, according to its website. Basically, Evergrande can host in its cities an entire country like Hungary or Greece, which have less than 11 million inhabitants each.

But Evergrande also has $ 300 billion in debt, the world's most indebted company and continues to default on its bonds, Business writes. In addition, it has 1.6 million undelivered apartments.

Beijing may block massive sales:

Evergrande China ghost cities
Evergrande China ghost cities

Ocean Flower Island, a huge $ 24 billion real estate project, was developed by Evergrande on an artificial archipelago north of Hainan Island. Despite its size, Evergrande is only a small part of China's residential market.

In 2017, Bloomberg wrote about a nightmare scenario for Beijing, in which people rush to sell their second homes if problems arise in the real estate market, driving prices down a spiral.

Professor Li Gan believes that this is not happening in China. And not because there would be no problems, but because the state makes it very difficult to complete a sale.

Authorities may require you to own a minimum number of years before selling or may simply block the transaction by not giving you the certificate of sale. However, he says that this phenomenon took place before the Evergrande problems.

Other developers also have financial problems:

But the problem could multiply and affect other real estate developers, creating a wave of bankruptcies.

Just last week, developer Fantasia missed a $ 206 million payment. A letter from September 2020 stated that it had debts to 128 banks.

Another danger is that the Evergrande crisis may change the perception that real estate is a safe investment in China, according to Xin Sun. And that's really a problem given that the sector makes up 29% of China's Gross Domestic Product (GDP).

Thus, a slowdown in real estate will lead to a deterioration of economic growth and public finances.

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