Core tip: The future of local real estate companies like this one mainly depends on the direction of real estate policy. Xingrun Real Estate is a microcosm of the distorted land finance system. In its later development, Xingrun Real Estate continuously bound more massive stakeholders: government, banks, suppliers, and so on.

 

　　21st Century Net: Since rumors emerged that Industrial Bank (601166, stock bar) stopped its real estate mezzanine financing business, it was like opening Pandora's box, prying open the capital magic bottle that real estate developers had desperately tried to cover up.

 

　　On March 17, Xingrun Real Estate's capital chain broke, owing a huge debt of 3.5 billion yuan, instantly becoming the focus of media attention. Subsequently, 21st Century Net rushed to the scene of the high-end project "Taoyuan Mansion" developed by Xingrun Real Estate. Apart from workers dismantling scaffolding, the project appeared desolate and deserted.

 

　　What kind of company is Xingrun Real Estate, and why could its debt crisis alarm the central bank and foreign media?

 

　　The Death of Xingrun Real Estate

 

　　On March 19, 21st Century Net rushed to "Taoyuan Mansion," a high-end project developed by Xingrun Real Estate in Fenghua City, Zhejiang. The scene was quite deserted, with no construction teams working, and the sales office was empty. Workers were dismantling scaffolding on site, and Xingrun Real Estate's office building had been converted into an Amway store. Taoyuan Mansion was originally planned to have 51 detached villas and 172 semi-detached villas, scheduled for delivery in December 2013, but now faces being left unfinished.

 

　　Through on-site interviews, 21st Century Net learned that the lowest price for a townhouse in the project was 5.6 million yuan per unit, and the highest price for a detached villa was 30 million yuan per unit. Yet Fenghua is merely a county-level city in Zhejiang, and such housing prices are already close to those of first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen.

 

　　According to locals, Xingrun Real Estate is a well-known real estate tycoon in Fenghua, with a development history of over 20 years. Most of the high-end residential communities in Fenghua were built by Xingrun Real Estate. According to incomplete statistics, Xingrun Real Estate has developed over 1 million square meters of property.

 

　　An informed source said that Xingrun Real Estate's most glorious period was in 2006, when the company achieved revenue of 2.501 billion yuan, ranking 33rd among Ningbo's top 100 enterprises and among the top 5 local real estate and construction companies in Ningbo. Xingrun Real Estate's project quality also had a good reputation locally in Fenghua. However, overnight, all honors have become distant memories.

 

　　According to information published on the local official website, the actual controllers of Xingrun Real Estate, Shen Caixing and his son Shen Mingchong, due to poor management, caused the company's capital chain to break, with liabilities of 3.5 billion yuan and actual assets of only 3 billion yuan, making it insolvent. Of the 3.5 billion yuan debt, more than 2.4 billion yuan is owed to bank loans, about 700 million yuan is private lending with factual evidence, and another 400 million yuan is owed in project payments and wages. In addition, there are huge amounts of "suspected fake mortgages" totaling nearly 240 million yuan. However, during 21st Century Net's on-site investigation, this claim did not receive a direct response from relevant departments, and relevant personnel from Xingrun Real Estate did not come forward to respond.

 

　　A Product of Distorted Land Finance

 

　　The break of Xingrun Real Estate's capital chain has dealt a predictable heavy blow to the local banking industry.

 

　　According to estimates by the Fenghua City Financial Office, in 2014, due to the Xingrun incident, the city will see an additional 1.9 billion yuan in non-performing loans, pushing the non-performing loan ratio to 5.27%, the highest in Zhejiang.

 

 Public information shows that Xingrun Real Estate had a strong local financial background. Founded in 1987, Xingrun Real Estate was a state-owned enterprise approved by the then Fenghua County People's Government, originally named Fenghua City Urban Construction Development Co., Ltd. In 2003, it was converted into a limited liability company in the form of a joint-stock system, and in 2005 it was renamed Zhejiang Xingrun Real Estate Investment Co., Ltd. It has a registered capital of 400 million yuan and has obtained the national first-class qualification for real estate development.

 

　　A real estate industry insider analyzed to 21st Century Net that the future of local real estate companies like this one mainly depends on the direction of real estate policy. Xingrun Real Estate is a microcosm of the distorted land finance system. In its later development, Xingrun Real Estate continuously bound more massive stakeholders: government, banks, suppliers, and so on.

 

　　In fact, Xingrun Real Estate's capital chain had already come under pressure four years earlier. During that period, the local government convened financial institutions for meetings multiple times, "requiring all banks to maintain existing credit lines, lower interest rates, not to pressure or delay loans, and to provide fiscal funds for loan rollovers."

 

　　The reason for this real estate company's collapse is also related to the local government raising land prices.

 

　　According to previous media reports, in January 2010, Zhejiang Xingrun Real Estate won a residential land parcel in Fenghua City for 660 million yuan, equivalent to a floor price of 7,852 yuan per square meter. Three months earlier, a nearby residential land parcel with a similar plot ratio was auctioned for only 3,204 yuan per square meter.

 

　　On this plot alone, Xingrun Real Estate's assets shrank by 390 million yuan. In the Changting Village old village renovation project, due to the land price decline, the company's assets shrank by at least 1 billion yuan.

 

　　At the same time, China's real estate market reversed in 2013. The market in third- and fourth-tier cities is basically saturated, with severe overcapacity in development. Only first-tier cities and some second-tier cities still have considerable room. Therefore, to keep the game of "10 pots with 7 lids" going—where developers borrow, buy land, develop, and borrow again—the first priority is smooth sales collections. Once there is a problem in the sales collection link, the capital chain faces collapse.

 

　　"Xingrun Real Estate is just the beginning of the collapse of Chinese real estate developers. In the future, more developers playing the 10 pots with 7 lids game will collapse, and it is not ruled out that even hundred-billion-yuan developers could face this situation. The game of passing the parcel in most urban real estate is nearing its end, and the bursting of the real estate bubble is by no means an isolated case of Xingrun Real Estate," the real estate insider told 21st Century Net.

 

　　Are 90% of Developers Insolvent?

 

　　Hong Hao, chief financial scientist of the China Financial Think Tank and a researcher at the Central University of Finance and Economics, stated in his blog that Xingrun Real Estate signals the arrival of a wave of developers fleeing, and that regardless of whether the central government regulates or not, the real estate bubble will burst.

 

　　Judging from data released by real estate companies since the beginning of this year, China's real estate market growth has shown signs of fatigue in both investment and sales.

 

　　On March 13, the National Bureau of Statistics released national real estate development and sales data for January-February 2014. From the data, the main feature of January-February 2014 is a decline in year-on-year growth. Main manifestations:

 

　　National real estate development investment in January-February was 795.6 billion yuan, a nominal year-on-year increase of 19.3%, with the growth rate down 0.5 percentage points from the full year of last year, a slight decline in investment growth; national commercial housing sales area was 104.66 million square meters, a year-on-year decrease of 0.1%, while commercial housing sales were 709 billion yuan, down 3.7%; the funding in place for development enterprises has become smoother than last year, with the national funding in place for development enterprises in January-February growing by 12.4% year-on-year, down from 26.5% for the full year of last year.

 

　　Nomura Securities also noted in a recent report that the number one risk facing China's economy is not shadow banking or local government debt, but excessive investment in the real estate market.

 

　　According to the official website of the Wenzhou Intermediate People's Court, last year Wenzhou conducted judicial auctions of 918 properties, with a transaction amount of 4.696 billion yuan, of which 52% were financial bond mortgage properties, involving non-performing assets of over 12 billion yuan. The average auction target amount exceeded 3 million yuan, which deterred potential bidders, and the success rate of judicial auctions for the year was less than 5%.

 

　　"Based on the situation in more than 100 cities over the past year or so, 90% of Chinese developers have long been insolvent. Bank loans, trusts, SME bonds, private equity funds, private lending, usury, and other financing methods are all being used. 90% of real estate debt ratios are above 150%-200%," Hong Hao said.

 

　　However, according to Tonghuashun (300033, stock bar) iFind data, in the Shenwan primary industry classification, the asset-liability ratio of the real estate industry is 73.27%.

 

　　Hong Hao is even more pessimistic, believing that currently all developers are financing with all means. Listed developers on the platform cannot raise funds domestically, so they go overseas. But more developers will pay a heavy price for acquiring land at high prices in the past two years. As long as they cannot raise funds, 90% of developers will collapse like Xingrun Real Estate.