INTL China’s Real Estate Collapse Infecting Troubled American Sectors

Kathy in FL

Kathy in FL

Administrator
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China’s Real Estate Collapse Infecting Troubled American Sectors

The crumbling Chinese real estate sector is starting to put properties around the world on the market at deep discounts, threatening debt-laden American commercial developers and the U.S. banks holding the loans, according to Bloomberg.

In a bid to pay off massive debts, Chinese real estate developers are having to offload a huge number of properties onto the global market, depressing prices even further for a sector that already has had borrowing cost hikes, causing a loss of $1 trillion in office property values, according to Bloomberg. The drop in property values hits American commercial real estate particularly hard due to the huge amount of debt the sector holds and the dwindling U.S. demand, with banks that hold the debt also fearing they may lose out on their investment.

“With motivated sellers, the market freeze could thaw, improving transparency and price discovery,” Tolu Alamutu, a credit analyst at Bloomberg Intelligence, told the outlet. “Portfolio valuations may have further to fall.”

Commercial real estate remains a risk in the US even after prices fell the most in at least 50 years. See our blog for more on how this heightens risks for investors and lenders. US Commercial Real Estate Remains a Risk Despite Investor Hopes for Soft Landingpic.twitter.com/7NrZy83ng7
— IMF (@IMFNews) February 4, 2024
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As time progresses and more properties sell at a discounted rate, buyers will hone in on the running market rate that will set property values, lowering the evaluation as new Chinese-owned properties flood the global market, according to Bloomberg.

A court in late January ruled that top Chinese developer Evergrande Group has to liquidate more than $300 billion in liabilities after being unable to create a restructuring plan despite two years of trying. The collapse is part of a broader crisis that has resulted in companies that are responsible for around 40% of homes in China defaulting on their debt since 2021.

American commercial real estate is facing $2.81 trillion in loans that are set to expire sometime through 2028, with developers either having to pay outright when the term comes due or refinance their debts. Interest rates on loans are experiencing upward pressure from hikes in the federal funds rate, which currently sits in a range of 5.25% and 5.50%.

Small and regional banks hold a disproportionate number of American commercial real estate loans, putting them at risk if developers are unable to pay their debts. Regional bank New York Community Bancorp stock reached a 27-year low over concern about its exposure to commercial real estate loans, according to Bloomberg.
 
H

Housecarl

On TB every waking moment
Then you've got their stock market sucking wind at the same time. If Xi knows any better he's sleeping with one eye open and crumpled newspaper around the door to his bedroom.
 
S

Squid

Veteran Member
Poorly written.

The trillion referenced are US properties mostly financed by US regional and local banks.

It’s more nuanced than is written. It will be painful but because it is such a mixed bag and these will occur over a long time that will likely see lower interest rates, I think most of the hit will be investors looking for easy money and assumed tax benefit.

Ha ha lots of Dr’s, attorneys and execs will take a bath. The banks learned their lesson in the housing collapse and will do everything up to and including forced sales to ‘operators’ and some extend and pretend.
 
20Gauge

20Gauge

TB Fanatic
Squid said:
Poorly written.

The trillion referenced are US properties mostly financed by US regional and local banks.

It’s more nuanced than is written. It will be painful but because it is such a mixed bag and these will occur over a long time that will likely see lower interest rates, I think most of the hit will be investors looking for easy money and assumed tax benefit.

Ha ha lots of Dr’s, attorneys and execs will take a bath. The banks learned their lesson in the housing collapse and will do everything up to and including forced sales to ‘operators’ and some extend and pretend.
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Commercial real estate will be a biggie in the 2028 election Whomever is President will have to deal with this between now and then. It is rising to a head too fast for them not to.

I expect American banks will be backed once again by the fed in some form to prevent a crash. Until then, they will quietly back them as needed.
 
Melodi

Melodi

Disaster Cat
A lot depends on whether there is some major player, be that an extremely wealthy individual, group of investors, or larger player, waiting in the wings to buy up all that commercial real estate and hold it until it has value again. Either as office space or to be converted into housing or torn down to make new housing.

While some things result from stupidity and short-term thinking, which I suspect the situation in China is unusual for their culture, money and greed can make things happen anyway, I suspect there is some planning going on with the US situation at least.

I wonder who is planning to pick up San Franciso for a Song? Ditto downtown Manhatten and some other places. There are areas, like some of the Mid Western cities (and I suspect this is true in China, too), that have no modern reason to exist because we no longer travel mostly by river and the factories have gone.

But other places, like San Francisco, New York, Boston, and even New Orleans, exist because they contain perfect harbors or similar natural resources that mean someone will always want to live there, at least in the longer term.

China built hundreds of empty cities as investments in places where no one wants to live as long as there are still places to live on the Coast where industry, commerce, and jobs are. I will be surprised if anyone wants to buy these up. Still, there may be people (or corporations) ready to buy up many commercially viable and useful areas when everything there collapses, which it is already starting to do.

Edited to add: Of course, there are some internal cities in the US (and I'm sure in China) that are viable, and for the same reasons, they were population centers to start with. Anything on the Mississippi or Yangtsee Rivers, for a start. But not all of them need to be as large or highly populated as they became in the late 19th and early 20th centuries.
 
hiwall

hiwall

Has No Life - Lives on TB
Which banks? just watch their stock price for a hint. there are several regional banks that have charts that look similar to this bank chart.

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