The Evergrande crisis, the second largest Chinese developer, has set off all the alarm bells in the financial markets, coining the name of the ‘Chinese Lehman’. But, does the Spanish real estate sector have to worry about the possible bankruptcy of this Asian colossus?
Despite the fact that at first the markets reacted negatively, the truth is that different analysts from firms such as A&G or DWS point out that the Evergrande crisis, nor a fact that has taken the Chinese government by surprise, which had already expressed concern about the possible bubble in the real estate market.
In fact, this crisis has been induced “mainly by the government regulatory measures introduced in August 2020,” explains Diego Fernández Elices, General Director of Investments at A&G Banca Privada.
These are three red lines that force promoters to, first of all, “keep their indebtedness below 70% of the value of their assets.” “The second is that they have sufficient treasury to be able to cover the short-term payments of their bank debts and the third requirement is that the debt does not exceed the amount of the capital”, details Mikel Echavarren, CEO of Colliers.
Evergrande was not able to stay within these three limitations and the truth is that the figures managed by the company are impressive if we compare them with the numbers left by the 2008 crisis in Spain. Specifically, the Asian firm and last week announced that it will not be able to repay a loan that expires tomorrow.
“Evergrande’s debt corresponds to about 40 times the debt of Martinsa Fadesa in the previous crisis and is also approximately the same level of indebtedness that the entire Spanish real estate sector had with the banks in 2008,” says Echavarren.
Thus, the manager highlights that it is “a potential crisis of colossal size, which would affect 1.5 million customers, and taking into account the implications that it may have for Chinese banks and without forgetting that it is a communist country and intervened It seems reasonable to think that the government will not haphazardly let this giant fall.” “Taking this into account and that the impact of an orderly restructuring should be less, we believe that it will be limited to the Asian market and should not significantly affect either the financial markets or the Spanish real estate market”, highlights the CEO of Colliers.
Solid balance sheets in the sector
On the other hand, the Spanish real estate sector currently enjoys iron health, which would be a positive point, according to Aleix Amorós, a geopolitical analyst and external advisor to a Spanish investment fund.
“I believe that the Spanish real estate sector is well positioned and has taken good note of the excesses of the past. Its leverage ratio is at manageable levels, and ongoing developments, contrary to what happens to Evergrande, are located in cities and areas with a high commercial return”.
In fact, the analyst considers that the crisis of the Asian colossus could even have a positive effect on the brick of our country. “There is beginning to be widespread contagion in the Chinese Real Estate sector, with names like Sinic Holdings, Fantasia Holdings or China Aoyuan. If access to credit is reduced as a result of the Evergrande crisis, there will be a halt in execution of ongoing promotions, which in turn will cause falls in the main raw materials associated with construction due to lack of demand, such as iron ore. This could have a positive impact on the margins of Spanish developers”.
In this sense, the analyst and economic consultant Gonzalo Bernardos, highlights that “the Chinese economy will buy much less raw materials from the world and this will lead to a drop in inflation and therefore the rise in interest rates will be further away”
“Certain countries like Germany and others that have a lot of trade with Southeast Asia are harmed, but Spain is harmed relatively little and only indirectly. But what it will gain from lowering rates exceeds what it can lose through trade “, Bernardo points out.
On the other hand, Amorós, puts on the table the reduced weight that the Chinese client has in the Spanish real estate market. “Barely 11.3% of home purchases were made by foreigners in 2020, and among these the British, Italians, Romanians and Moroccans stand out above all. The weight of Chinese capital in our real estate market is practically residual.”
Therefore, Amorós concludes that “unless there is a general collapse, which encompasses multiple areas of the Chinese economy and this ends up having an impact on consumer confidence on a global scale, a significant impact for the Spanish real estate sector cannot be expected” .
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