China Property Sector: How much would it take to settle project delivery risk?
- Watch for risk of further spreading in mortgage payment suspension
- >Rmb1.1trn will be required in form of direct monetary support to contain delivery risks
- Banks may have limited incentive from a commercial angle and administrative guidance will be required
The number of projects involved in mortgage payment suspension has grown exponentially to >200 by today and is no longer readily traceable. Meanwhile, there are rising voices on the street recommeding the government and banks to intervene and offer monetary support to ensure project delivery. We have therefore opted to analyse 1) how big could this phenomenon theoretically grow to; and 2) how much may be required from governments and banks to keep project delivery in check.
Still at the start of the mortgage payment suspension wave. We assume undelivered projects are mainly comprised of presales in 2020 and 2021. Inferred from the two years of presales from the 35 names we track, c.43% of these project sales-(in GFA terms) are related to developers who have entered into bond extensions or defaults (inclusive of offshore and onshore markets) and are deemed riskier in terms of project delivery. Alongside the assumption that 30% of such developers’ presold projects may subject to delivery uncertainty, this would translate to c.2,000 projects in total or c.13% of project solds in the past two years, as compared to the latest number of 200+. We believe the number of involving cases will continue to surge before adaquate measures are introduced by the government.
A phenomenon in dire needs to be timely settled by the government. Extended from our estimated number above, the involved residential sales amount would amount to >Rmb3trn, and could potentially affect c.4.0 million families. In the event that fears over project delivery cannot be timely settled, recovery in the physical market will likely be put off and surviving developers to face tougher liquidity challenges (see our comment in News Alert: Suspension of mortgage servicing – Looming uncertainty ahead), thereby posing risk of further defaults in surviving names and increases the number of projects that could be subject to delivery risks.
>Rmb1.1trn will be required to contain delivery risk… We note there have been voices in the market recommending the government to work along with banks to offer direct monetary supports in order to contain potential risks of project delivery. We have therefore dug a bit deeper and extended our analysis above to project the potential size of the monetary support required to address this incident.
We estimate that, in our base case where 30% of project presold by liquidity troubled developers (i.e. entered into bond extension/default) are subject to delivery risk and that 30% of the construction costs on average have already been settled upfront, the monetary support required may amount to c.Rmb1.1trn.
…but lacks incentive for banks from a commercial angle to support the action and administrative guidance will be required. New mortgages from 2020 and 2021 have in total comprised of 22% of the existing mortgage balance of c.Rmb38.3trn. Based on similar assumptions as our above analysis, mortgages that may be subject to risks would come in at c.Rmb1.05trn, which is slightly short of the monetary support size required to avoid the mortgage default. Bank will likely have limited incentives from a commercial angle to take on this initiative in our view in the absence of contribution and guidance from the government.