Evergrande is China’s largest real estate developer and – currently – possibly its biggest real estate disaster.
All of this happened at a rapid pace – from the red flags in 2018 to the risk of construction stoppage to massive investor losses this year. This should also be understood as a warning about what can happen when jumping into foreign real estate.
But first, for those who didn’t know, here’s the video that’s making its rounds on social media:
And now, here is an abbreviated timeline for those interested in the background of the current situation:
Evergrande is the largest real estate developer in China by 2020 sales (according to Mingtiandi) and has completed nearly 1,300 commercial, residential and infrastructure projects to date.
Their wealth and equity have been booming in recent years, but not in terms of net income. There are many reasons for this, but one of the most important was that it appears to be over-indebtedness.
It is now estimated that they managed to complete nearly $ 300 billion in debt and a staggering 1.4 million homes that they pledged – roughly $ 270.75 billion in pre-sale debt (as of late June ).
While this is still in the air, hope that the Chinese government will bail out this company is also dwindling.
So what should Evergrande’s situation bring to our attention?
- Don’t assume developers can finish building
- If a developer goes down, you don’t know who will take over
- Foreign legal systems are a great risk
- Size and branding can only encourage the deception
1. Don’t assume developers can complete construction
In China, like in Singapore, you pay a deposit to secure your device, even if it has not yet been built.
Evergrande real estate buyers – of which there are around 778 projects in 223 cities in 2020 – trusted the developer to complete the work. But since last week Evergrande started to stop construction.
Evergrande’s suppliers and contractors must be paid; And because the company is no longer stable, they are not ready to grant loans. In extreme cases, this can lead to the project being discontinued.
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While that hurts for the contractor, the main losers are the homebuyers. Your depot has got stuck, construction can – and must – never be completed.
The only “way out” is that Evergrande can sell more vacant units and thus finance further construction. But who is buying property from a developer who is about to discontinue projects? Nobody wants to take this risk.
This creates a downward spiral of declining sales as Evergrande shows it can’t complete projects and more project closings as sales decline.
We saw this in Singapore too, but it’s very rare
The last time this happened was in May 2019 when a developer failed to complete the Laurel Tree and Sycamore Tree condos. There was no more money to pay the contractor and buyers risked losing their down payments for nothing (no further news about the situation).
At least we can be sure that such cases are rare here. Real estate developers are vetted by the government and must have adequate capital, secure debt, etc.
When buying abroad, remember that you don’t know how strict the authorities are. It is entirely possible that the developer does not have the capital to complete the project; and desperately looking for sales to fund it.
Be especially careful when contacting the overseas developer through seminars or advertisements. If they have a good project that is in high demand, why don’t the locals buy it? Why do they have to come to you?
2. When a developer fails, you don’t know who will take over
What if Evergrande goes bankrupt and can’t complete a project? It is likely that other developers will move in and finish it if it is to their advantage. That means that if you choose a developer who doesn’t figure it out, you really don’t know who you’ll end up with next.
It can be another trustworthy name, or it can be a first-time developer who sees an opportunity to run their first project at a huge margin (making buyers their guinea pigs).
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It’s worse if it happens abroad because you don’t know the laws there. In some cases, the acquiring developer may be able to charge more than the existing project – this could mean charging more money if you want to finish your unit.
There may not be any contractual terms preventing the new developer from changing plans; You could reduce the number of facilities, downsize parking spaces, use cheaper processing of the various units, etc.
Delays are also inevitable as a new developer often wants to change the main contractor or several of the subcontractors. Even if another company steps in, you will likely incur costs.
3. Foreign legal systems are a great risk
Taking legal action in Singapore is already difficult. Imagine having to do it in China because you bought an Evergrande project; or in another legal system.
Even if you can find a lawyer overseas, the fees are likely high – and it can be frustrating to communicate across time zones, get documents translated, or in some cases fly in person.
Be aware that when foreign property sellers come to Singapore they may not be bound by regulatory authorities.
Suppose you go to a real estate seminar hosted by an overseas sales team. Since the sales team is not local real estate agents, they are not under the supervision of the Council of Estate Agencies (CEA).
Any rules imposed by CEA – like the need for full disclosure, proper licensing, sales commissions, etc. – are not enforced. Nobody intervenes if these sellers misrepresent the property or lie outright.
This creates an unfair situation where you have to shop without adequate information.
ALSO READ: Don’t Let “Official” Developer Sites Fool You: 7 Tell-Tale Signs To Expose The Counterfeits
4. Size and branding can only encourage the deception
Most homebuyers are smart enough to avoid overnight real estate ventures. These are usually small and opaque. Evergrande, however, was China’s second largest real estate developer; and one of the largest on the international stage.
The size of the company and its branding made buyers less cautious. Even now, some believe that China must save Evergrande, so their losses are limited.
If it turns out that’s not true. then the size and brand of the company simply fueled a lack of caution.
So when you buy overseas, don’t assume it is “safe” because you are buying from a bigger developer.
Real estate abroad is not the best idea for new investors
Before buying property in another country, be prepared to take a higher risk. You need to make sure that you don’t thwart your financial plans if the property can’t be completed or if there are significant political shifts abroad. Only buy what you can afford to lose.
This article was first published in Stackedhomes.
