Buyers refusing to pay mortgage negative in the near term
- On 13 Jul, local media reported that homebuyers in c.80 projects in China are refusing to make mortgage payments as construction has been halted.
- We think regulators and local governments are likely to intervene in the near term, as they seek to avoid any kind of social unrest.
- We expect this development to hurt sector sentiment in the near term.
- We advise investors to stay invested in SOE or good quality names, such as CR Land, COLI and Longfor.
- For high-beta names, we like CIFI and Country Garden.

Homebuyers refusing to make mortgage payments
? On 13 Jul, local media reported that homebuyers (in a total of 84 projects as of 13 July) in several cities (e.g. Zhengzhou, Changsha, Jingdezhen, Wuhan, etc.) in China jointly published a notice suspending mortgage payments after some developers halted construction of some projects due to liquidity problems.
? The reports said that homebuyers claimed that the banks breached the rules of lending when the projects were launched for presales.
? In particular, they alleged that 1) banks released homebuyers’ mortgage loans to developers before the buildings were topped out – the required criteria for the release of loans, and 2) banks allowed the mortgage loans to go to unsupervised bank accounts (instead of escrow accounts), which led to the outflow of funds from the projects and resulted in construction halts due to insufficient funds.
? Homebuyers claim that banks should take responsibility for these alleged actions. The notice states that homebuyers will not make mortgage payments until projects’ construction work resumes.
We believe regulators will step in soon
? The news spread rapidly in China and hit the already-weak sentiment in the property market over the past two days.
? We believe regulators and local governments in China could intervene in the near term to prevent a contagion, given that it is top priority in China to avoid any potential social unrest, such as protests.
? The potential solutions, in our view, could include 1) fund injections by policy banks to ensure completion of the projects, 2) introduction of state-owned enterprises (SOE) or big private developers as strategic investors for multi-phase projects, and 3) new financing provided by local government financial vehicles or bank guarantees by local governments.
Stay invested in SEO and good quality names: CR Land, COLI & Longfor
? Despite our Overweight rating on the sector, we think the news could continue to drag down developers’ share prices in the near term until policy makers intervene to solve the issue.
? Developers’ sales in the near term may also be affected by the news, in our view.
? We advise investors to remain invested in SOE developers, such as CR Land or COLI, or good quality developers, such as Longfor. For high-beta names, we like CIFI and Country Garden.
? Key risks to our call include 1) weaker-than-expected sales in 2H22F, and 2) defaults by a higher-than-expected number of developers.
? Prompt resolution of the issue or stronger-than-expected sales in 2H22F could catalyse the sector.
