Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Dragging out bad news rarely makes it better. The same applies to China’s slow-motion property-market crisis. Housing developer Sunac this week said it would try to restructure its debts for the second time in 18 months. Nearly five years since Beijing tried to rein in overstretched builders, the sector’s debt doom loop is edging only slowly towards resolution.
Sunac, whose portfolio includes everything from grand neo-mansions to indoor ski slopes, said on Tuesday that it would rejig its overseas liabilities based on “actual conditions” rather than the “expectations” that underpinned its November 2023 deal. The week before, it had warned of worsening net losses as a result of slumping sales.
Liquidity crunches do not necessarily lead to liquidation, of course. Several US companies have entered its Chapter 11 bankruptcy process more than once, among them fashion retailer Forever 21, which sought the courts’ protection earlier this week. Should Sunac default again, it won’t even notch up another “first” for China: fellow developer Kaisa already did so, in 2015 and 2021.
An issue for struggling Chinese companies, though, is that without the kind of well-established system for failing firms that exists in the US, they are left feeling their way through uncertain processes in China itself as well as through the slow-moving, English law-based Hong Kong court system.
Offshore restructurings agreed via a court take up to 13 months to be heard, according to rating agency S&P Global Ratings, compared with eight months for non-property groups. After being heard, they still need a further two months to resolve. Small wonder Sunac’s bonds, due for repayment in September 2025, have traded between just eight and 18 per cent of face value for the past two years.
But while Sunac’s restructuring is both slow and painful, there are signs that its market is improving. Home sales in China are stabilising, with secondary sales making up a greater share of activity. The government has pledged more support for the sector, too.
Not all developers are benefiting equally from this. Homebuyers reportedly prefer state-backed ones because they are less likely to run out of cash before handing over the property. Next best are those whose credit rating, as provided by Moody’s, is close to investment grade. They saw an average year-on-year sales rise of 20 per cent in January and February. Those with riskier ratings saw theirs fall 60 per cent. Investors too are differentiating: last month Greentown China issued the first offshore, dollar-denominated bond from a mainland developer in more than two years. Demand was three times supply.
These green shoots are tiny, and offer little solace to Sunac, which now has a month to produce a plan. Grinding through all of China’s property excesses will still take years. But if it is approached with realistic expectations then Sunac’s second bond overhaul may add to that sense of progress.