Beijing expected to ‘step in’ to prevent China Evergrande contagion

Senior executives at two of Canada's biggest institutional real estate investors said they expected state intervention to prevent the developer's $300bn debt pile from becoming a global issue.

What should the institutional private real estate world make of Chinese development giant China Evergrande’s bombshell news last week that it had appointed advisers and warned markets of debt defaults? Unscripted, that was the first question posed by moderator Pertti Vanhanen, managing director for Europe at Manager Cromwell Property Group to PERE Europe’s opening panel this week.

“They have 1.2 million or 1.3 million apartments under construction and are now the world’s most indebted property organization at the moment,” Vanhanen stated. “That has sent shock waves all over APAC and also European markets. How do you see this impacting?”

Shenzhen-based China Evergrande owes $305 billion and has low cash currently. This week, the developer has started to miss certain bond repayments, spooking markets worldwide. Its share price has crashed from HK$20 ($2.56; €2.19) a year ago to just HK$2.36 today. Its offshore bonds last traded at approximately 30 cents on the US dollar, according to a report by Reuters. Approximately $20 billion of its outstanding debt is owed to offshore lenders.

On PERE Europe’s opening panel, senior executives of two of the private real estate market’s biggest institutional investors, Ivanhoé Cambridge and CPP Investments, held calls with Asia colleagues earlier that day to ascertain the contagion risks that could be associated with China Evergrande’s possible collapse. Neither finished their calls unduly concerned.

Karim Habra, head of Europe and Asia-Pacific at Ivanhoé Cambridge, replied to Vanhanen’s question: “We had a call on this this morning. This is a typical example of a company everyone knew to be badly run. But it was very big. Investors were very greedy so continued to invest in their high-yield bonds. It was a typical ‘too big to fail.’ We’ve been there before.”

Habra: Evergrande is another ‘too big to fail’ situation

Habra believes defaults by the developer will have an impact on liquidity in China, especially when it comes to financing development. He also predicted this would weaken the RMB as a currency. But he said: “The most resilient assets will continue to perform. China’s main goal today is political stability. So we believe they will make sure they’ve tried everything they can to limit the contagion.”

Indeed, China’s central bank has injected cash into the country’s banking system to relieve fears. However, it has also been notably quiet on whether or how it would help China Evergrande itself.

Andrea Orlandi, CPP managing director and head of real estate investments, Europe, said he also spoke with colleagues before the PERE Europe Forum. He reported back a similar expectation of state intervention, even as a rescue package remained invisible: “The expectation in the market is of an orderly wind down for the company not to have an impact across the value market. You have to believe the Chinese government will step in and do something about it.”

CPP Investments manages C$44.6 billion ($35.2 billion; €30 billion) of real estate, while Ivanhoé Cambridge, the real estate unit of Quebec’s pension manager Caisse de dépôt et placement du Québec, manages C$60.4 billion, according to PERE research.