Erste Asset Management

Has the real estate boom in China come to an end?

Has the real estate boom in China come to an end?
Has the real estate boom in China come to an end?
Share post:

The liquidity problems of the Chinese real estate developer Evergrande are heralding the end of the real estate boom in China.

The economic boom of China has gone hand in hand with an unprecedented boom in the real estate industry over the past decades.

However, this boom has its drawbacks and has led to an oversupply in recent years: according to a report by the Financial Times, the current vacancy rate in China would provide housing for more than 90 million people. A small number for China, but remarkable from a European perspective. After all, the vacant apartments would be enough to accommodate the entire population of one of five G7 states (France, Germany, Italy, the UK, or Canada).

“Real estate prices in China are stable.”

Wilhelm Spitaler, Portfolio Manager of Erste AM

The collapse of Evergrande: a self-inflicted malaise

The Chinese government reacted to the real estate boom and the resulting risks such as oversupply and speculation by imposing regulatory measures: Beijing has drawn – as the Financial report goes on to explain – three “red lines” in order to reduce the leverage: the ratio of debt to assets has to be below 70%, the ratio of net debt to equity has to be below 100%, and the ratio of cash to short-term liabilities has to be at least 100%. Evergrande violated all three thresholds, which led to the company being prohibited from taking on any further debt and thus caused financial difficulties and the current crisis. Said crisis is now increasingly turning into a political one.

The real estate market is an important part of the Chinese success story and thus also important for the future development of the country, which has proclaimed the motto of “common prosperity”. Rising real estate prices and prosperity are closely linked to the prospering economy; the government in Beijing has to ensure the sustainability of this development. Prosperity can also be achieved by way of innovation or the development of green technologies; here, China is currently in transition; this transition seems compromised by the problems of a large real estate company.

A bail-out of the company could lead market participants to a point where they, too, would want to claim help from the state. This is something the government in Beijing cannot and surely will not support.

However, as the volatile market has shown in recent days, a bankruptcy could also have negative effects on the economic development of China as a whole and put the political goal of common prosperity at risk.

Next days show if the problem is solved

The coming days and weeks will therefore probably show how the problem can be resolved; the most likely scenario is some sort of orderly liquidation that will cause the investors losses but that will prevent any spill-overs into other economic areas.

Evergrande is the first victim of the Chinese governmental regulatory measures – and unfortunately one of the biggest companies in the Chinese real estate sector. This is why the impact can even be felt on the US and the European stock exchanges.

To be fair, the rating of the company was never particularly good; it was never considered investment grade; indeed, the international rating agencies had rated it highly speculative for years. The economic downturn caused by the corona pandemic has now led to financial difficulties. Any economic ripple could really have set off a situation like this, so we should not be surprised.

Development of real estate prices in selected Chinese cities selected (Source: Bloomberg, as of 31 August 2021)


We are somewhat surprised though about the limited effect the Evergrande story has had on the real estate prices in selected Chinese cities, as shown in the graph above. We shall take this as positive signal that any negative effects from a possible Evergrande bankruptcy will remain within reasonable limits.

Legal note:

Prognoses are no reliable indicator for future performance.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *

1 Comment

  1. Peter says:

    According to our information, the housing market in major cities (all in the chart above) were already highly regulated even prior to 2021. It is a similar situation as the Shanghai stock index, which did not respond to the outbreak of the 2020 pandemic. Therefore, it would be our approach not to draw conclusions based on official data alone. Just like we saw in the past 2 years, radical regulatory interventions are often the cause of market disruptions. In this case, just like the intervention in the education industry, the action to intervene was justified, but the methods applied were not adequate. In our estimation, the spillover effect is not going to be felt beyond the domestic and international investors already vested in the Chinese real-estate markets. – And those, also referring to the afore mentioned low credit quality, should have know what they are dealing with.