China Cities Signal Property Crash By Halting Apartment Sales

Category: Bankruptcy Law Published: Wednesday, 21 January 2015 Written by Admin

Without explanation, authorities in two Chinese cities have refused to issue approvals for transfers of apartments built by selected developers, including troubled Kaisa Group.

Most analysts believe the extraordinary moves are related to Xi Jinping's so-called anti-corruption campaign, but that explanation fails to explain certain crucial facts. There is reason to think there could be bankruptcy law factors behind the withholding of the approvals, which have unsettled markets in recent weeks. The bankruptcy explanation suggests a market correction is coming soon.

Late last year, Shenzhen began to withhold ordinary approvals and permits to Kaisa. Later, Kaisa in a December 21 filing with the Hong Kong Stock Exchange, disclosed that Shenzhen had blocked pre-sales at four of its projects.

Then last week the Wall Street Journal reported that Hangzhou, in coastal Zhejiang province, blocked the sale of almost all the apartments in Kaisa's 749-unit Xixi Puyuan project. The Journal, in a cryptic passage, raised the possibility that the projects of other developers in Hangzhou had also been affected.

Moreover, Shenzhen has begun blocking the sales of at least five other builders. In the middle of last week, the city's Urban Planning Land and Resources Commission stated that sales of 2,800 units constructed by China Overseas Land amp; Investment were blocked.

Shenzhen has also stopped sales in projects of Rongchao Real Estate, Dong Dao Real Estate, and China Merchants Land.

And Fantasia Holdings Group may now be under a partial sales ban with four units at Hua Xiang Garden listed as "restricted."

There is little known about the blockages. Fantasia's chairman, Pan Jun, maintains that the ban relates only to circumstances peculiar to the four purchasers, not Fantasia itself. Shenzhen, for its part, said the blockage on flats built by China Overseas was normal.

Yet even with the comments involving the Fantasia and China Overseas blockages, extremely little is known about the sales bans. Shenzhen has disclosed almost nothing else on the general matter. Moreover, authorities in Hangzhou did not explain the freeze on Kaisa's flats, and, as the Wall Street Journal noted, it "wasn't clear" whether the authorities in the two cities were coordinating their actions against the now-beleaguered developer.

In the absence of definitive information, analysts have come up with theories. For instance, the withholding of routine approvals to Kaisa suggested to many that the company had somehow run afoul of authorities in that bustling southern Chinese city. As the South China Morning Post told readers, "This raises the possibility that the roots of its woes are at least in part political."

In this regard, Bloomberg Bloomberg on the 15th of this month reported that "two people familiar with the matter" said that Kaisa was being investigated over "links to a senior Shenzhen official" who was "under probe."

Yet the corruption narrative, which is accepted by most observers, fails in one critical respect. It does not explain why the two cities are taking actions that punish innocent parties, the purchasers of units.

Anne Stevenson-Yang of Beijing's J Capital Research calls the anti-corruption narrative "all but irrelevant." In an e-mail message last week, she suggests that Shenzhen stopped apartment sales to ensure that its own banks "are first in line when the cash is distributed." Kaisa is already holding purchaser deposits, but until purchasers take title, their rights can be easily superseded by the developer's bank creditors.

Stevenson-Yang's theory is consistent with reports that Shenzhen banks have asked courts to freeze Kaisa's assets. It appears that, in response to the banks' move, more than $100 million of the developer's assets have been judicially locked down.

This bankruptcy law theory, unlike the one about Xi's corruption campaign, takes into account why that city has been willing to risk social unrest by prejudicing the rights of thousands of prospective homeowners. Hundreds of purchasers flooded a Kaisa office on Tuesday to demand that the Shenzhen government allow the sales to go through.

It is surprising, in light of the massive oversupply of residential units, that so few of China's developers have failed. So far, the central government and localities have managed to keep property markets afloat by various delaying tactics.

Now, however, two localities look like they are switching their approach and trying to put some builders out of business. So the withholding of routine approvals could be a sign that local governments acknowledge that prices will have to adjust soon, and they are at this moment favoring some developers and lenders in what is essentially triage.

Officials undoubtedly realize they can determine which builders go under by simply withholding licenses and permits, thereby constricting the flow of cash to them. After all, Kaisa's growing problems--payment defaults and court-ordered freezes--were triggered by Shenzhen's blockage of sales.

So expect a wave of defaults as Chinese cities, choosing among developers, simply not issue critical approvals to some of them.

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