Could Evergrande Impact Global Property Prices?

Patrick Boyle On Finance

Patrick Boyle

Investing, Business

4.9 • 320 Ratings

🗓️ 12 October 2021

⏱️ 12 minutes

🔗️ Recording | iTunes | RSS

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Summary

Send us a textChina’s crackdown on property developers threatens the London property market.Evergrande, the world’s most indebted developer, sparked fears across global markets as it missed a crucial interest deadline on its offshore debts. This week, another developer, Fantasia, defaulted on an offshore bond. A property consultant close to London’s development market was contacted in the wake of the Evergrande crisis by a UK regulator with concerns about the risks of contagion in London. “Th...

Transcript

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0:00.0	Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.
0:27.2	Welcome back, everyone. A quick follow-up on the Evergrand story to discuss how the Chinese
0:32.7	property collapse could affect property prices in the rest of the world, and in London in particular.
0:39.2	The biggest Chinese developers don't just build in China, many of developments all around
0:44.0	the world.
0:45.0	So in today's piece we'll discuss their international investments and how they might be affected
0:50.4	by de-leveraging.
0:52.2	As I'm sure most you know, Evergrand is China's second largest
0:55.5	property developer and the world's most indebted real estate developer. They've been all
1:00.8	over the news recently, having sparked fears across global markets two weeks ago when they
1:05.9	missed an important interest payment deadline on their offshore debts. This wasn't classified as a default as there's a 30-day grace period on that coupon payment.
1:16.8	Then last week another smaller Chinese developer Fantasia defaulted on an offshore bond and
1:23.4	more troublingly we learned that Fantasia also defaulted on a $100 million loan to
1:29.0	Country Garden, which is China's largest property developer.
1:33.6	The fact that these struggling real estate companies are lending to each other makes
1:38.3	contagion within the industry more of a risk.
1:42.0	There's been a problem for some time with excessive leverage in the Chinese economy
1:46.5	and in the real estate sector in particular, and Chinese regulators have been trying to reduce
1:52.1	the economy's over-reliance on debt. Their main approach has been to implement the three red lines
1:58.5	policy for property developers, which came into effect in August 2020. The three red lines policy for property developers, which came into effect in August
2:02.6	2020. The three red lines were hard limits on three leverage ratios for these companies.
2:10.0	The new policy meant that not only could these developers no longer borrow any additional funds,
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