The Chinese real estate sector has been immersed in a turbulent environment for months since it was made public in the second half of 2021 that Evergrande, the largest Chinese real estate developer, was at risk of a liquidity crisis. Despite the fact that more than a year has passed, their situation is far from improving, in fact, at the end of June the resignation of the CEO and CFO was announced after an internal investigation implicated them in alleged irregular practices of financing. It must be borne in mind that the exit from the leadership did not occur at any moment, the Chinese promoter has an estimated debt of 300,000 million, moreover, Evergrande is considered to be the most indebted promoter in the world.
And as if it were a shock wave, this situation is beginning to affect the rest of the companies in the sector. The best example of this is Country Garden. The Chinese real estate developer presented yesterday the results corresponding to the first half of 2022 and the data is not good, it has declared an attributed net profit of 612 million yuan (89 million euros) in the first six months of 2022, which represents a 96% drop compared to the result of 14,996 million yuan (2,176 million euros) for the same period of 2021. And the expectations for the coming months are not good, Country Garden itself has warned that 2022 will be a difficult year for the real estate sector, with weaker sales and demand expectations and falling prices, which will put pressure on all participants in the industry.
And this cut in the accounts is not new, 2021 has already closed with significant drops in profits. If the state of the five largest real estate companies in the country by turnover at the end of 2021 is analyzed, with the exception of Evergrande due to its particular situation, the data is not good. Greenland saw its profit reduced by more than 57%, from 1,906 million euros in 2020 to 810 million in 2021. A cut similar to that suffered by China Vanke, which saw its profits cut by almost 44%, from 5,275 million euros to 2,956 million. In the case of Country Garden, its annual profit fell by almost 21%, falling to 3,517 million euros. Within the top 5, only China State closed the year with good vibes and earned 8.8% more compared to 2020.
And given the data from Country Garden for the first half of the year, it does not seem that this situation is going to be corrected, at least in the short term. In addition, it is not alone, the balance of the first six months of 2022 of Greenland is also known, which has cut its profit by more than 43% compared to the same period of 2021.
Although the data is not good, there are dissenting voices in the market that are optimistic. New guidelines to ease escrow account rules look promising and, if implemented, could provide much-needed liquidity to property developers after last year’s cash crunch and indiscriminate write-downs. UBS. “We are optimistic that conditions will improve once the Omicron crises ease, especially for better capitalized companies with strong balance sheets and more accessible funding channels. In the long term, we expect these property developers to survive the current consolidation of the sector and come out even stronger”, they add.
Despite UBS’s optimism, it doesn’t look like Evergrande’s pre-crisis numbers will recover this year, at least the consensus of FactSet analysts believes. In fact, according to market estimates that go up to 2025, the 2020 figures will not be recovered in the short term. China Vanke will close the year with a profit 30% below that registered in 2020, that of Country Garden will be 33% lower and that of Greenland almost 50%. As it happened in 2021, China State will continue to overcome the crisis caused by Evergrande and the profits of the next years will not be affected.
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