Eternity Applies for Bankruptcy Protection in the United States
The real estate crisis in China continues to worsen as Evergrande, one of the country’s largest property developers, files for bankruptcy protection in the United States. On August 17, 2023, Evergrande sought Chapter 15 protection with the New York City Court, a move that would safeguard its assets in America.
Evergrande’s financial troubles started in 2021 when it defaulted on payments. Since March 2022, trading in the company’s shares has been suspended. The company’s liabilities have soared to $300 billion, equivalent to over 10.6 trillion baht, or about three times the budget of Thailand, constituting 61% of the nation’s gross domestic product.
Evergrande’s massive size has raised eyebrows among investors and industry executives, as allowing a company to grow to such an extent is deemed imprudent.
A glance at Evergrande’s website reveals that the company has developed a staggering 1,300 real estate projects in over 280 Chinese cities. Additionally, it operates various businesses, including electric vehicles and football clubs.
This conglomerate encompasses 860 affiliated companies and has provided housing for a staggering 12 million Chinese citizens. If we assume an average household size of three, it means that Evergrande has built around 4 million housing units.
In 2020, Evergrande reported a total revenue of 2.475 trillion baht, making it almost two-thirds of Thailand’s national budget. However, its net income was recorded at 39,411 million baht, with total assets of 11.229 trillion baht and a capital of 1.7 trillion baht. Since 2021, the company’s income has steadily declined, reaching 1.122 trillion baht at the end of 2022.
Unfortunately, this downward trend continued, and by the end of 2022, Evergrande had suffered a loss of -516,860 million baht. Its assets were reduced to 8.971 million baht, and it had negative capital of -2.923 million baht.
The bankruptcy of Evergrande is predicted to have three major implications:
- A significant number of individuals who invested in Evergrande’s real estate projects before construction commenced may lose their deposits if the company goes bankrupt.
- Many businesses that have collaborated with Evergrande, such as design and construction companies, as well as suppliers of various materials, are also at risk of bankruptcy.
- China’s financial system will undoubtedly be affected by Evergrande’s collapse.
However, in China, the sale of properties is typically withheld until the construction reaches a certain stage. The law also safeguards homebuyers’ down payments through the establishment of an Escrow Account.
Consequently, the direct impact on the housing market in China is expected to be minimal. On the contrary, this situation may result in more affordable properties for potential buyers. However, financial institutions and entities within Evergrande’s supply chain will undoubtedly bear the brunt of the crisis.
The unregulated proliferation of completed but unoccupied homes is a concerning trend in China, with over 50 million empty units. Thailand, South Korea, and Japan also face similar issues, with empty house figures reaching 1.2 million, 1.5 million, and 8.5 million, respectively.
These dormant properties could be liquidated to resolve the debt crisis, offering an advantageous opportunity for homebuyers. Moreover, there has been a noticeable decline in Chinese investment in real estate abroad. Chinese home purchases in Thailand, for instance, are projected to decrease in 2023.
Looking at investment purchases by Chinese investors overseas, there has been a noticeable global shrinkage. In Cambodia, Chinese investment projects have slowed since Chinese investors began returning home due to the COVID-19 pandemic. Presently, there is minimal Chinese interest in Cambodia.
During August 16-18, 2023, I conducted research on real estate in Vientiane. It became apparent that various Chinese investment projects, entailing land leases for 70-99 years, have stalled. In some cases, efforts have been made to attract other investors to participate in the development, a departure from the norm, as Chinese investors typically invest individually.
Additionally, a grand office building in China is on the verge of being put up for sale, aiming to repatriate funds. Similar to the situation in Thailand, Chinese tourists and investors have significantly reduced their activities. Chinese businesspeople are yet to return to their pre-pandemic engagement levels.
Lessons from Evergrande: The Need for Financial Discipline and Consumer Protection
Evergrande’s collapse serves as a reminder of important lessons that must be learned:
- The state must exercise caution and prevent excessive borrowing by land developers to sustain unsustainable expansion. Allowing businesses to grow haphazardly invariably leads to bubbles and the risk of bankruptcy, as witnessed in numerous global crises. The government bears the responsibility of managing financial discipline.
- The Loan-to-Value (LTV) ratio is a crucial measure. Prospective homebuyers should be required to provide a substantial down payment of at least 15-20% of the property’s value. Moreover, unbiased home valuations need to be conducted, without allowing banks to assess and lend against self-assessed property values, thus preventing a recurrence of the 1997 crisis.
- Measures should be implemented to protect the interests of contracting parties, akin to the use of Escrow Accounts.
Although Thailand already has the Escrow Act BE 2551, it has proven to be inadequate due to its inefficiency and lack of enforcement.
Crucially, the involved parties should agree on whether a neutral agency should be established to collect and safeguard down payments, thereby preventing entrepreneurs from misusing these funds.
Major land development companies seem inclined to reject such measures due to their established credibility. Meanwhile, smaller businesses fear the disadvantages associated with Escrow Account fees. Consequently, the implementation of Escrow Accounts in Thailand lacks stringent enforcement.
Nevertheless, having an Escrow Account provides numerous benefits. It instills confidence in homebuyers, guaranteeing the delivery of the property and ensuring the return of their down payment in the event of the land development company’s bankruptcy. Simultaneously, Escrow Accounts bolster the stability of land developers’ businesses.
When homebuyers feel secure in their purchases, they are more likely to invest, contributing to the growth of the industry. Neglecting Escrow Accounts merely benefits prominent figures and does not foster the development of small and medium-sized enterprises (SMEs).
Preventing and resolving crises necessitates prioritizing consumer interests and adhering to sound financial practices.
About the Author
Sopon Pornchokchai, Ph.D., is the Executive Chairman of the Thai Real Estate Research and Valuation Information Center at the Agency for Real Estate Matters Co., Ltd. For more information, visit www.area.co.th.
EternityApply for case protectionbankruptIn the United States, while the real estate crisis in China is raging By filing for bankruptcy protection under US law, Chapter 15 with the New York City Court on August 17, 2023, which will allow Evergrande to protect its assets in the United States.
The companydefault on paymentThe big time is in 2021 and trading in the shares of this company has been suspended since March 2022. The company has liabilities up to $ 300 billion, or more than 10.6 trillion baht, or about 3 times the budget of Thailand. or nearly two-thirds (61%) of Thailand’s gross national product.
Therefore, this company has a very large size. investors and executives of this company Allowing the company to grow to this extent is considered something that should not happen.
Check out the Evergrande website. The company has developed a total of 1,300 real estate projects in more than 280 cities across China. Furthermore, it also operates other businesses such as electric vehicles and football clubs.
Including all 860 affiliated companies and have developed houses for 12 million Chinese people together. If one house has 3 people, it is equivalent to building about 4 million units.
In 2020, Evergrande has a total revenue of 2.475 trillion baht, or almost two-thirds of Thailand’s national budget. but it has a net income of 39,411 million baht, it has assets of 11.229 trillion baht and it has a capital of 1.7 trillion baht and since 2021, income has decreased respectively until the end of 2022
Although the income was 1.122 trillion baht, it was considered to have decreased by more than half and had a loss of -516,860 million baht, with assets reduced to 8.971 million baht and negative capital of -2.923 million baht.
The BBC analyzed that Evergrande’s bankruptcy will have three major effects:
1. A large number of people are buyingreal estateof Evergrande before starting construction They have already paid the deposit and may have lost the money. If the company goes bankrupt
2. Many companies have done business with Evergrande, such as design companies, construction companies. and companies selling various materials that would also be at risk of bankruptcy, and
3. Effects onChina’s financial system
However, in China, he refused to sell the paper. The construction must reach a certain level before it can be opened for sale. And there is protection for the home buyer’s down payment by law to look after the interests of the parties (Escrow Account).
Therefore, it is believed that the direct impact on the housing market will not be great. And it might even be good to have cheaper properties for people to choose to buy, butfinancial institutionAnd activities in Evergrande’s supply chain will be directly affected.
In China, there are over 50 million units of completed but unoccupied homes, a development that has not been well regulated recently. There are around 1.2 million empty houses in Thailand, 1.5 million in South Korea and 8.5 million in Japan.
These houses can be sold, if they can be retranslated. It will make people who buy a house benefit. It is a great way to help resolve the debt.
From observing investment purchasesreal estateohChinese investorAbroad, it seems to be shrinking globally. In Thailand, Chinese home purchases could shrink in 2023. In Cambodia, especially Dara Sarko, investment projects from Chinese investors have been slow in Sihanoukville since Chinese investors return home during COVID-19. and a little before At the moment there is not much return to Cambodia.
During August 16-18, 2023, the author traveled to explore real estate in Vientiane. Various investment projects China’s land lease for 70-99 years seems to have stalled. Some places were announced to find other investors to join together to help develop. which is something that has never been done before Because Chinese investors often come to invest themselves.
The author also found a beautiful and grand office building in China. which is about to announce for sale to bring money back to the country As is the case in Thailand, Chinese tourists and investors are slowing down. The expectation that Chinese businessmen will come in is very similar before the period of COVID-19. so he has not yet come back to see
Lessons from Evergrande China remind us that
1. The state should not allowland developerBorrowing too much money to pay off debt for such endless expansion Business growth is irrational as it should be. inevitably produces bubbles and risks bankruptcy This has happened in almost every crisis around the world. The government should manage financial discipline well.
2.Measures LTV (Loan to Value) is important Currently, we should require that those interested in buying a house have a real down payment of at least 15-20% of the value of the house. and has an unbiased home valuation Don’t let the bank assess the house yourself, lend yourself, which led to the 1997 crisis.
This LTV measure may cause land development companies “I can’t breathe” but it is still better than letting it become “Evergrande 2” now, some of the listed land development companies are in bad shape.
3. should comeMeasures to look after the interests of the parties to the contract (Escrow Account) come and use
Thailand has Escrow Act BE 2551 But it is a “very bad” law because there is a law so that there is no law.
Due to letting house buyers and sellers agree with that Will there be a neutral agency to collect our down payment or not? (To prevent entrepreneurs from taking misused “Elui scurvy” money)
Big entrepreneurs seem to say no. because it already has a good reputation As for the little ones, don’t take it because it will be a big disadvantage. Escrow Account fees must be paid, agreed in Thailand, therefore not strictly enforced.
Having an Escrow Account is a good thing. That will make home buyers confident that buying a house or condominium will definitely get the property AND the down payment will be returned if the land development company goes bankrupt first. On the other hand, an Escrow Account benefits the land developer.
Because when home buyers are confident when buying they will flock to buy Improve the business Not having an Escrow Account is just a big advantage. celebrity only It does not promote entrepreneurs at the SME level in any way.
A crisis can be prevented and resolved. By adhering to the interests of the people, consumers are important.
Foreign real estate column
Dr Sopon Pornchokchai
Executive Chairman Thai Real Estate Research and Valuation Information Center
Agency for Real Estate Matters Co., Ltd.
www.area.co.th
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