China’s Top Property Tycoons See Fortunes Drop $30 Billion With Even More Losses Expected

The days of property moguls dominating China’s wealth rankings appear to be at an end.

Beijing’s campaign to roll out nationwide real estate reforms has been particularly costly to the founders behind the country’s top three property developers by sales who have seen their collective fortune plunge by $30 billion since the World’s Billionaires List was published in April.

The wealth wipeout felt by the likes of Hui Ka Yan, Yang Huiyan and Sun Hongbin is indicative that the heydays of double-digit growth in sales and profits for Chinese real estate are over–and more losses will almost certainly follow.

“Real estate will probably be turned into utility-like public services,” says Hong Hao, managing director and head of research at Bocom International in Hong Kong. “Profit margins will be limited and no one will be allowed to make big money.”

Analysts say Chinese President Xi Jinping envisions a relatively staid market that would see developers building more affordable housing. The country’s leader is determined to curb excessive borrowing in the sector. He also wants to stop the skyrocketing rise in real estate prices that have strained the finances of average households, deterred them from spending more on areas such as child raising, and exacerbated the country’s yawning wealth gap between the rich and the poor.

Billionaire Hui Ka Yan is bearing the brunt of the impact. His China Evergrande Group is urging patience and asking offshore creditors not to take “aggressive legal actions” as the company formulates a restructuring plan. Evergrande, once the country’s largest developer by contracted sales, has been stuck in a liquidity crisis after China stipulated borrowing limits and issued its “three red lines” policy in August 2020. Hui, who lost 80% of his once $42.5 billion fortune in 2017, is struggling to repay more than $300 billion in liabilities racked up during previous years of debt-fueled expansion.

Driven by the belief that housing prices would keep going up, and revenues earned would always outrun the costs, Evergrande borrowed from its employees, retail investors, as well as a wide range of financial institutions including banks and trust firms to acquire land and build apartments.

But after funding dried up and home prices tumbled, Evergrande’s model turned to bust. The entire market has seen a parade of defaults from not just Evergrande, but Kaisa Group, Shimao Group, China Aoyuan Group and Guangzhou R&F Properties, the sell-off in sector-related bonds and stocks has extended to better-quality names such as Country Garden and Longfor Properties.

Last week, market jitters spread to the Hong Kong-listed shares of Country Garden, which plunged as much as 8.1% in just one day due to concerns that the firm had failed to win sufficient support from investors for a possible convertible bond deal. The crisis of confidence caused Country Garden’s chairman Yang Huiyan, the richest woman in China, to see her fortune drop more than $1 billion in just one day. Although the panic ebbed the following day and the shares recovered some of their losses, Yang’s net worth has taken a $6.2 billion hit since April as shares of her company plummeted by more than one third, bringing her fortune down to $23.4 billion.

Sun’s Sunac was recently downgraded by both Fitch Ratings and S&P Global Ratings. Fitch cited the company’s “decreasing financial flexibility amid high capital-market volatility.” The company raised $580 million in mid-January by selling 452 million shares at HK$10 apiece, or a 15% discount to its closing price at the time. But it needs more liquidity, and may have to sell assets later, according to Fitch.

The government is aware that the real estate overhaul is impacting everyone. But recent policy adjustments shouldn’t be taken as a sign of weakening resolve, says Qu Hongbin, chief China economist and co-head of Asia Economics at HSBC in Hong Kong. “The determination remains great and the strength of the reform is unprecedented,” he says.

However, to avoid a sudden crash of the entire sector, which, by some estimates, can account for as much as 25% of China’s GDP, authorities have issued directives to accelerate the approval of mortgages, ease funding for certain mergers and acquisitions and cut a key interest rate for the first time in almost two years to help bolster the overall economy.

The falling fortunes come at a time when China’s GDP may only grow 4.3% in 2022, according to Nomura economists Lu Ting and Wang Jing, compared with official figures of 8.1% in 2021. The real estate downturn, sporadic outbreaks of the coronavirus and slowing export growth may all cast a shadow over the world’s second-largest economy. In December, home sales shrank by 19.6% from a year earlier, and property investment decreased by 14% while financing received by real estate developers are down 19.3%.

Authorities are considering lifting some of the restrictions placed on properties companies’ access to proceeds from presold apartments held in escrow accounts. This year, state-run banks could resume lending to real estate companies with healthier balance sheets, says HSBC’s Qu. 

Meanwhile, state-backed companies are playing a more active role in the property market. Minmetals International Trust Co., a subsidiary of the state-run metals and mineral company China Minmetals, recently took over two of Evergrande’s residential projects in the southern cities of Kunming and Foshan to “ensure home delivery, ensure people’s livelihood, and ensure stability,” according to a Reuters report.

Some analysts have urged caution in reforming the property market. “In light of the current difficulties in the overall economy, overhauling the real estate sector would proceed with greater caution,” says Shen Meng, director at Beijing-based boutique investment bank Chanson & Co. But he adds that the resolve is “unwavering,” and the real estate developers’ profit margin would be controlled within a reasonable range.