China’s real estate market has been booming in recent years, but the country is now seeing a number of empty buildings. The reason for this is that there are too many new developments to keep up with demand.
LU’AN (China) — In this provincial city approximately 350 miles west of Shanghai, rows of 26-story residential buildings lie unfinished, their plastic tarps blowing in the wind.
Golden Pegasus sculptures guard an unfinished $9 billion amusement park that was intended to be larger than Disneyland somewhere in Lu’an. The steel frame of a proposed $4 billion electric-vehicle factory, which is key to local politicians’ economic ambitions, has overgrown plants pouring onto the road.
The buildings are memorials to China Evergrande Group’s once-grand aspirations, which are now among the world’s most indebted property firms, as well as a case study in how China’s reliance on real estate as an economic engine helped fuel those dreams.
Evergrande is in difficulty in part because it aggressively expanded assets in areas like Lu’an, where its debt-fueled construction binge coincided with the city’s population decline. Hundreds of initiatives were started in more than 200 Chinese cities.
Evergrande accumulated more than $300 billion in liabilities as it grew. It said in September that it was experiencing extraordinary problems and that it was attempting to safeguard consumers. It missed a planned interest payment to foreign bondholders a few days later. Evergrande and its property-management subsidiary stopped trading in Hong Kong on Monday, citing the possibility of a buyout offer, which would provide Evergrande with much-needed cash.
The company’s problems are one of the ramifications of Beijing’s decision last year to force developers to start cleaning up their balance sheets in order to reduce financial system risks. Global investors are concerned that the crackdown would cause financial market turmoil or a long-term real-estate slump. People who purchased unfinished tower apartments are unsure where their money went.
“We spent our whole family’s resources on this apartment,” said a 59-year-old farmer surnamed Jiang, who, like other Lu’an purchasers, refused to provide her first name for fear of offending the business.
Evergrande actively developed in Lu’an; a Sunday street scene there.
She purchased a home in an Evergrande complex named Junting, or “Jade Palace,” with 47 apartment towers for 890,000 yuan ($138,000) in August, she claimed. Locals claim that work was stopped months ago. Ms. Jiang said that she had no idea when or if it will resume. “We have no idea what to do,” she said.
Over the last decade, Evergrande has finished a number of projects in Lu’an and handed over houses to purchasers. Evergrande, according to a spokesperson, would do all necessary to guarantee that its projects are completed “wherever the city or area is.” Officials from Lu’an did not reply to demands for comment.
Evergrande’s growth was fueled by a booming real-estate market in China, where everyone from developers to bankers to municipal officials had an interest to keep the boom going. Evergrande found a market for its projects among a variety of purchasers, including corporate workers and farmers looking to relocate to more urban regions, who thought that property values would increase regardless of what happened and that Beijing would protect them from falling prices.
Developers were a source of income for municipal officials. Due to their limited taxing authority, Chinese towns rely on land sales to property developers like Evergrande to generate around a third of their income. Cities annex farmland in order to sell it to developers; farmers typically receive a discount on apartment purchases.
Real estate has become the most significant source of income and economic engine in certain communities. Lu’an made $1.2 billion in land sales in the first half of this year, compared to $900 million in overall tax income.
For the last five years, however, property construction in smaller cities in China has outpaced demand from prospective occupants, leaving the market increasingly reliant on speculators and investors to buy properties, according to Logan Wright, China markets research director at Rhodium Group, a New York-based research firm. According to statistics from the China Household Finance Survey, around 21% of houses in urban China were unoccupied in 2017, equating to 65 million empty units.
Lu’an grew into a sprawling metropolis of approximately 6,000 square kilometers.
As China tightens its regulations, new house building has stalled and housing prices have fallen in many areas. According to Rhodium Group, local governments’ land-sales income dropped by 17.5 percent in August compared to a year earlier.
In a recent report, Goldman Sachs analysts cautioned that a severe slowdown in China’s property market may “exacerbate and magnify negative pressure” on the labor market and the country’s broader economy. Real-estate-related activity now accounts for almost a third of China’s GDP, according to some estimates.
The majority of analysts and investors think Evergrande will be restructured by China’s government. The People’s Bank of China said late last month that it will “maintain the healthy development of the property market and protect the legal rights and interests of home purchasers.”
Nonetheless, analysts believe that if Beijing continues to drain excess debt and root out real estate speculation, there would be a loss of economic activity.
In larger cities, several Evergrande projects seem to have done better. While certain constructions in Guangzhou, in southern China, were stopped, work on other projects began in late September, according to Chinese media.
Customers are greeted by a street-food seller in Lu’an.
In the last ten years, Lu’an has lost 5% of its population. Many of Lu’an’s four million inhabitants are over 60, and the city’s average yearly disposable income of $3,500 is less than the national average of $5,000, according to official statistics.
Evergrande, on the other hand, spent more than $10 billion in Lu’an between 2011 and 2020, building residential complexes, the EV plant, and the “Fairyland” theme park, which features pastel-colored European-style pedestrian blocks and a slew of animal characters, including a reindeer-like creature and a blue dragon.
The Wall Street Journal visited four unfinished Evergrande projects in Lu’an in late September and found that work had halted. Nearby shop owners reported a drop in sales as a result of the construction workers’ absence. Employees at one Evergrande workplace slept or gathered over their cellphones.
According to a Journal check of Tianyancha, a Chinese corporate database, at least 23 cases concerning commercial bills—a kind of IOU among Chinese businesses—have been filed this year against Evergrande’s companies in Anhui province, where Lu’an is situated. Paint, cable, concrete, and elevator manufacturers, as well as construction firms, were among the plaintiffs. The Journal was unable to locate any such cases in the prior year’s database.
This month, the Evergrande Junting site in Lu’an.
Evergrande was established in Guangzhou in 1996 by Xu Jiayin, a woodcutter’s son who, according to local media, grew up in an impoverished hamlet. Hui Ka Yan, his Cantonese name, became well-known.
Mr. Hui built Evergrande into a national powerhouse with over 150,000 employees, claiming year after year record sales as housing prices rose. According to research company Hurun Report, Evergrande’s stock price increased more than fivefold in 2017, the year Mr. Hui briefly became China’s wealthiest man.
The firm was able to generate funds in part by preselling apartments to house purchasers who paid cash up front and then waited for the buildings to be completed. According to Capital Economics, Evergrande’s debtors include purchasers of 1.4 million units that the company pre-sold and pledged to construct but has yet to do so. Evergrande also took out loans from banks and international investors.
It went beyond real estate and into mineral water manufacturing, as well as purchasing a professional soccer team. It entered the electric-vehicle sector through China Evergrande New Energy Vehicle Group Ltd., a Hong Kong-listed EV company with a market value of $87 billion, more than most major automakers at the time.
According to Journal estimates based on local-government data, it joined the theme-park industry in 2017, unveiling 15 projects throughout the country totaling more than $100 billion in investment. Around the same time, Dalian Wanda Group, a conglomerate that had pledged to compete with Disney parks in China, announced that it was exiting the industry due to excessive debt.
At the entrance of Evergrande Fairyland, there are statues.
On Sunday, Fairyland was open to the public.
Land availability for new development in major cities like Beijing and Shanghai was limited, so Evergrande, like many other developers, resorted to smaller, more out-of-the-way towns like Lu’an, which had plenty of land to sell.
Around 2011, Evergrande started purchasing property in the Lu’an area, which was then a quiet town known mostly for Lu’an Melon Seed Tea. Other big developers raced in as well, with Evergrande launching at least a half-dozen significant residential projects in the region.
To get an apartment, buyers would frequently wait for hours or enter lotteries. According to local media, a top Anhui provincial official publicly complimented Evergrande in 2012, stating the company’s “size and brand name make it a dragon-head-like business in China with worldwide impact.”
According to Journal estimates based on data from Lu’an’s housing authority, Evergrande was Lu’an’s largest developer based on the number of units sold before building work was finished between 2019 and September 2021, with 8,123 new flats presold.
Commercial buildings and a movie theater were added by Evergrande. According to Anhui Property Information Network, a research company that tracks government land auctions, it purchased 14 additional lots in Lu’an in 2019, bringing the city’s land sales to over $2.6 billion that year. The sales aided in the local government’s decision to triple its fiscal-revenue budget for the year.
Around that time, Evergrande selected Lu’an as the location for one of its EV subsidiary’s factories. According to local media, Evergrande claimed it will manufacture up to 500,000 vehicles a year, generate $15.5 billion in industrial production, and provide $1.2 billion in yearly tax income to the local government.
Lu’an’s Evergrande electric-vehicle factory.
Yoko Kubota/The Wall Street Journal photo
Lu’an evolved into an urban sprawl extending over approximately 6,000 square miles, with housing-block rows bordered by agriculture, as residential developments grew and people moved into finished constructions. New York City is about 300 square miles in size.
Evergrande has experienced financial difficulties in the past, but has always managed to overcome them. Then, in August 2020, Beijing announced intentions to clamp down on developers’ excessive borrowing by enacting the “three red lines,” which imposed restrictions on the company’s ability to take on new debt.
Evergrande’s real estate, amusement park, and electric vehicle (EV) businesses all lost money in the first half of 2021. According to the Journal, the company’s cash flow got so tight this summer that it began paying some vendors with incomplete residences. Complaints filled the local government website in Lu’an, with several purchasers of incomplete houses fearing losing their life savings or being homeless in retirement.
A huge unfinished section of Evergrande’s Yujingwan, or “Imperial Scenery Bay,” a complex spanning several blocks, was among the projects whose development seemed to have stopped last month. Ms. Wang, 41, a lady who goes by the name Ms. Wang, was selling drinks and groceries across the street at a convenience shop she established in 2017.
Ms. Wang said she paid more than 400,000 yuan for an apartment in the complex’s so-called Sixth Phase last year after Evergrande provided an approximately 35% discount. She borrowed money from friends and family to purchase the new house, which she claims will be completed in 2023.
She thinks the government, or perhaps a state-owned corporation, will step in to complete the project. That view was shared by other purchasers.
It’s unclear where the money received from house purchasers via presales by developers like Evergrande has gone. According to the Journal, developers often utilize the money for general operations financing.
On Sunday, the Evergrande Yujingwan complex has a new entrance.
On Sunday, inside the Fairyland complex.
On the late-September visit, the Evergrande theme park was only partly operational, with a few minor attractions and a few eateries available. The park was surrounded by unfinished apartments. The carousel had come to a halt.
—This paper was co-written by Bingyan Wang, Stella Yifan Xie, and Eva Xiao.
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