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China Overseas Land & Investment (688 HK - US$22 billion) － also known as “COLI” － is one of China’s largest property developers.
You might wonder why I bother spending time on the Chinese property market, now that it's in the midst of a crisis. But I want to make the case that the story is more complex than what media is portraying.
After China’s residential property market was liberalised in 1998, construction took off almost exponentially. And the floor space under construction rose 15 times in the subsequent two decades.
Eventually, construction activity became so high that the number of new starts exceeded actual sales by over 10 million apartments per year. The result was a build-up of unfinished and unsellable properties in lower-tier cities.
The solution to the over-construction problem came in August 2020. At that time, the People’s Bank of China met with 12 property developers and asked them to improve their balance sheets. The developers had to adhere to three requirements － “Three Red Lines” － including the net gearing ratio, the liability-to-asset ratio and the cash-to-short-term debt ratio.
It just so happens that almost all of China’s private property developers failed these requirements and, therefore, had to deleverage. One by one, they’ve started to default on their offshore debt and enter bankruptcy proceedings.
But despite the negative headlines, China’s state-owned enterprise (“SOE”) developers including COLI, China Resources Land and Yuexiu are doing just fine. They continue to enjoy low-cost funding from China’s state-owned banks. And buyers feel at ease buying properties from the SOE developers, knowing that they're not going to fail.
Make no mistake though: COLI has also had its fair share of challenges. Its earnings dropped in 2022, due to difficulties of completing projects during the zero-COVID policy. Ordinary citizens have also found it difficult to access the mortgage market.
So using the lens of the 2008 Great Financial Crisis to assess the Chinese property market. We're not necessarily going to see transaction volumes and home prices fall. We're just witnessing a top-down effort to deal with the overconstruction problem by cutting off the access to credit for certain developers.
In fact, I'd argue China’s state-owned developers might even benefit from the crackdown. Almost all of them have gained market share in the past two years, as buyers have shunned companies like Evergrande due to the fear of construction delays. And we’re now seeing signs of state-owned developers buying assets from their private counterparts at low valuations.
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