Could China’s Evergrande crisis affect our market?
The second largest real estate development company in China, a firm known as Evergrande, is facing what seems like certain doom.
After years of reaping the benefits of a very bullish Chinese real estate market, Evergrande has reportedly run out of money and run out of places to get more money. It is now holding the bag for roughly $300 billion in debt. Could this far away real estate financial crisis in China somehow impact our local Aspen-Snowmass real estate market?
It’s easy to look at this news and think that a real estate crisis in China has no effect on investors, property owners and others who are involved in the real estate market in the United States, but that’s simply not the case. According to industry experts and world economists, the Chinese market is widely considered the most important aspect of the global economy. China’s real estate market is valued at around $55 trillion, making it worth twice as much as its American counterpart. Additionally, that $55 trillion is about four times higher than China’s gross domestic product.
According to economists who extensively study China, the real estate industry and everything that goes into it (construction costs and other property-related services and goods) makes up approximately 29% of China’s GDP. That is somewhere between 10% and 20% higher than the GDP percentage that is made up of real estate in most other developed nations.
The Evergrande collapse is a big deal. Understanding how it collapsed is the first step of learning from the mistakes of others. Understanding what it means for the Aspen real estate market, and the United States as a whole, is another.
Evergrande’s history goes back roughly 25 years, when Chinese businessman Hui Ka Yan founded the firm in 1996. While it started out as a real estate development firm, the entity quickly expanded and started purchasing businesses in other fields, ranging from wealth management to food and drink manufacturing. Evergrande even owns one of the largest soccer teams in China: Guangzhou FC.
While Yan was once China’s richest man, his net worth has taken a hit recently, largely due to the issues surrounding Evergrande. The firm, which owns around 1,300 real estate projects across 280 Chinese cities, quickly expanded several years ago. In order to fund this expansion, Evergrande took on around $300 billion in debt.
In 2020, Beijing implemented new rules that dictated how much land big real estate developers could own. Obviously, this affected the plans that Evergrande had going forward, but the conglomerate’s issues were already starting to catch up. With $300 billion in debt and the worldwide impact of the COVID-19 pandemic making development more difficult, Evergrande started offering properties for much less than they originally wanted. In their effort to show creditors that there was still some money coming in and to keep the business afloat, Evergrande started making much less money. Now it’s in a nearly insoluble position.
Obviously, there are some real estate markets that only impact the country in which they are located. For instance, if the real estate market in a developing country took a hit, the economic impact would largely be confined to that area. However, due to the size of China’s real estate market and the Chinese economy’s role on the rest of the world, an Evergrande collapse could certainly cause issues, even for those of us in the Aspen-Snowmass area.
The ramifications for the Aspen real estate market could be felt on multiple levels. First, many of the investors who hold shares in Evergrande specialize in international investment opportunities. If Evergrande defaults on its bond payments, which seems possible, it could ripple through international bond markets, particularly the junk bond and global stock markets. The Aspen market has been an attractive investment for both domestic and international investors, many of whom have direct ties to global financial markets. If a large number of these investors were to lose money in an Evergrande collapse either directly or indirectly, it could result, at a minimum, in postponing or canceling plans to buy property in Aspen. The extreme would be investors having to liquidate their current investments in the Aspen area.
Obviously, there is no indication yet that an Evergrande collapse in China is going to negatively impact the local real estate market. However, when dealing with a potential crisis of this size, it’s important that property sellers and buyers monitor the situation. We’ve seen situations in the past, such as the mortgage crisis 13 years ago, and most recently, the COVID-19 crisis that started in China, in which distant events ended up having a profound impact on our economy.
What collateral damage a real estate crisis in China could have on the rest of the world is still unknown, but as Warren Buffet likes to say, “You never know who’s swimming naked until the tide goes out.”
Lori and William Small, CCIM, are recognized luxury and commercial real estate experts with Coldwell Banker Mason Morse in Aspen. They can be found through their website, theSmallsaspen.com, or via email at thesmalls@theSmallsaspen.com.