10/15/2021 Evergrande crisis shines a light on China's millions of empty homes - CNN

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'Ghost towns': Evergrande crisis shines a light on China's millions of empty

homes

By Michelle Toh, CNN Business

Updated 10:49 PM ET, Thu October 14, 2021

Evergrande's unraveling is still commanding global attention, but its troubles are part of a much bigger
problem.

For weeks, the ailing Chinese real estate conglomerate has made headlines as investors wait to see
what will happen to its enormous mountain of debt. As the slow-moving crisis unfolds, analysts are
pointing to a deeper underlying issue: China's property market is cooling o after years of oversupply.

The warning signs have been flashing for some time. Prior to Evergrande's meltdown, tens of millions of
apartments were thought to be sitting empty across the country. In recent years, the problem has only
gotten worse.

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Residential buildings seen in Beijing on Sept. 17, 2021. "Residential property demand in China is entering an era of sustained decline,"
according to one economist.

Mark Williams, chief Asia economist at Capital Economics, estimates that China still has about 30 million
unsold properties, which could house 80 million people. That's nearly the entire population of Germany.

On top of that, about 100 million properties have likely been bought but not occupied, which could
accommodate roughly 260 million people, according to Capital Economics estimates. Such projects
have attracted scrutiny for years, and even been dubbed China's "ghost towns."

Here's a look at some of those projects, and how the problem first originated.

A worker installing safety netting at an apartment block under construction in the Nanchuan area of Xining, Qinghai province, China, on Sept.
28, 2021.

Real estate and related sectors are a massive part of China's economy, accounting for as much as 30%
of GDP. The proportion of economic output related to construction and adjacent activities is "far higher
than in other major economies," according to Williams.

For decades, that has helped the country sustain rapid economic growth.

But for years, critics have questioned whether that engine of growth was creating a ticking time bomb
for the world's second largest economy. That's in part because of the massive debt many developers
took on to finance their projects.

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As China's most indebted developer, Evergrande has become

the poster child of unsustainable growth, with more than L IV E T V
$300 billion worth of liabilities.

However, "Evergrande is not the only one struggling," noted

Christina Zhu, an economist at Moody's Analytics. Over the
last few days, a slew of other developers have disclosed their
own cash flow issues, asking lenders for more time to repay
them or warning of potential defaults.

In a recent report, Zhu wrote that 12 Chinese real estate firms

Related Article: 5 things to know about the
Evergrande crisis: A simple breakdown
defaulted on bond payments totaling about 19.2 billion yuan
(nearly $3 billion) in the first half of the year.
"This accounted for near 20% of total corporate bond
defaults in the first six months of the year, the highest across
all sectors" in mainland China, she added.

CNN's Andrew Stevens walking down an empty highway at rush hour in Shenfu, one of China's so-called "ghost towns," in 2016.

The pandemic brought activity to a temporary standstill. But construction later roared back to life as
China reopened, and the country's property market enjoyed a brief rebound.

Since then, however, the market has sputtered again. And there's no sign of immediate relief.

Over the last few months, "measures of price growth, housing [construction] starts and sales" have
tapered o considerably, Zhu noted. In August, property sales, as measured by floor space sold,
dropped 18% compared to the same time the previous year, she added.

That same month, new home prices edged up 3.5% "from a year earlier, the smallest growth since the
property market rebounded from the pandemic fallout in June 2020," wrote Zhu.

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Listings of apartments for sale displayed at a real estate o ce in Shanghai, China, on Monday, Aug. 30, 2021.

"Residential property demand in China is entering an era of sustained decline," Williams wrote in a
research note. He called this "the root of Evergrande's troubles — and those of other highly-leveraged
developers."

Then there is the problem of unfinished projects, even if there is demand. The majority of new properties
in China — about 90% — are sold before being completed, meaning that any setbacks for home
builders could directly impact buyers, according to economists.

Chinese homebuyers looking at housing models of a residential property project in Huai'an city, Jiangsu province, China, on Dec. 23, 2018.

"[This] gives the authorities a strong incentive to ensure that ongoing projects continue as failing
developers are restructured," said Williams.

According to recent analysis from Bank of America, Evergrande has sold 200,000 housing units that
have not yet been handed over to buyers. That has exacerbated fears that home buyers may be left
empty-handed by the country's second biggest developer.

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Residential buildings under construction seen at Evergrande Cultural Tourism City, a project developed by Evergrande Group, in Suzhou,
Jiangsu province, China, on Sept. 23, 2021.

In recent weeks, the government has turned its focus to limiting fallout from the crisis and protecting
ordinary people. In a statement late last month, the People's Bank of China vowed to "maintain the
healthy development of the real estate market, and safeguard the legitimate rights and interests of
housing consumers."

While it did not refer to Evergrande specifically, the central bank has been pumping cash into the
financial system lately to help stabilize the situation and calm nerves.

A skyline view of o ce buildings pictured at dusk in Tianjin, China.

To be clear, not all companies are in dire straits. While some players are clearly struggling, "most
developers are not on the brink of default," according to Julian Evans-Pritchard, a senior China
economist at Capital Economics.

"With a couple of exceptions, most major developers are in a much stronger financial position than
Evergrande and should be able to weather a temporary spike in their borrowing costs amid contagion
fears," he said in a note to clients. That should provide some reassurance "amid the current market
jitters," at least in the short term, he added.

But in the long run, it may matter little.

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"Successfully navigating the structural decline in housing demand over the coming decade will prove
more challenging," wrote Evans-Pritchard. "A drawn-out consolidation of the sector over many years L IV E T V
seems more likely than an imminent wave of developer failures."

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