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Teetering property developer Evergrande sparks contagion fears for China’s economy

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Real estate developer China Evergrande Group is on the verge of collapse, burdened by a huge burden of debt and billions of dollars in real estate that it cannot sell as quickly and profitably as expected.

While trouble has been brewing for a year, it is now coming to a head as the company missed a loan payment in June and more are expected. Evergrande offices have been the scene of angry protests this week, and things could get even uglier on Monday if the company is likely to miss another key interest payment to its increasingly concerned financiers.

Evergrande’s potential collapse raises fears that it could drag other parts of China’s housing market with it – and affect business interests outside of China as well.

Here’s a quick explanation of what you need to know about history.

What is Evergrande?

Evergrande was founded in 1996 in the Chinese city of Shenzhen, across the border from Hong Kong, and is primarily a real estate developer whose core business is buying land and converting it into residential property. Company founder Hui Ka Yan is a former steel worker who was responsible for the real estate boom in China in the 21st

The company has built more than 1,300 housing developments in 280 cities in China and is planning an additional 3,000 projects in various cities across the country.

But like any good conglomerate, it has spread to all sorts of other businesses, including bottled water and groceries, electric vehicles, theme parks, a Netflix-like streaming service with nearly 40 million customers – and even a professional soccer team.

Why is it in trouble?

Debt – and a lot of it. The company has nearly two trillion yuan in debt on its books, which is more than $ 300 billion. The company has aggressively borrowed money to buy more land for development and quickly sold low-margin homes to raise enough cash to start the cycle again – which works well as a business model until it stops working .

In late 2020, new rules that took a closer look at the company’s finances showed a higher-than-expected debt burden. This, coupled with increasing construction delays, frightened buyers and started a vicious circle. The company began its descent to pariah status as lenders and buyers lost their nerve in lockstep.

Every attempt by Evergrande since then to distract from his problems has only served to draw more attention to them. The lenders became more and more insecure. Existing owners were upset. New sales slowed, creating a feedback loop that made lenders even more nervous.

CLOCK | Investors furiously protest outside Evergrande offices:

Chinese real estate jitter

Buyers of Chinese property developer Evergrande are demanding responses from management as fears grow that the company may collapse under its debt burden. (David Kirton / Reuters) 0:34

In June, the company admitted it had failed to pay a loan. The next month, a Chinese court froze a $ 20 million bank deposit at the request of one of its lenders. At least one believer, a paint supplier, is reportedly getting paid in apartments that won’t be ready until 2024.

According to Bloomberg, advance sales on two projects in Hunan were suspended on July 19. Three days later, Hong Kong banks stopped offering mortgages for the company’s incomplete projects in the city. On August 9, two more projects in Kunming halted construction due to defaulted payments, followed by similar halts on projects in Nanjing and Chengdu. There has been snowballing since then. The company’s stock price plummeted 90 percent last year, and most of its bonds are in junk status.

The company is behind on its commitments to more than 70,000 investors. There are more than a million buyers of unfinished projects in the balance. And the pace of problems is increasing. “Sales could continue to plummet as the property developer may struggle to restore the confidence of potential homebuyers,” said Lisa Zhou, an analyst at Bloomberg Intelligence.

Monday numbers are a turning point for the company as Evergrande is set to make a $ 80 million interest payment on one of its many loans, and there is next to no chance it will pay them – which could make the watch ticking towards some undesirable results.

What could happen?

There are a number of somber B-words on the table – bankruptcy, separation, buyout, or bailout – and none of them are ideal.

The first option would be the most painful.

“If Evergrande defaults on its debt as expected and goes through a restructuring process, I don’t see why this should be curbed,” Michel Lowy of distressed investment firm SC Lowy told Reuters.

The delayed Emerald Bay residential project in Hong Kong has scared buyers. (Lam Yik / Bloomberg)

But given the Chinese government’s longstanding pursuit of stability, this is also the most unlikely outcome. The company owes money to 128 different banks and has behind nearly every 20th property sale in China in the past five years. Evergrande has nearly 200,000 permanent employees, but hires nearly four million people annually to work on various projects.

With such a broad reach, analysts covering the sector are confident Beijing won’t just let the company collapse. “Evergrande’s escalating crisis could prompt government action to prevent social instability,” Zhou said.

More likely, a version of the next two options, a split or a buyout, where the company sells assets to raise cash and enlist help to manage things, is more likely. “State-owned companies or other developers can also take on Evergrande’s projects after Chinese officials send accounting and legal experts to review the company’s finances,” Zhou said.

However, a full government bailout is also unlikely. China has cracked down on its soaring tech sector, trying to regulate and ban cryptocurrencies and curb excesses in all possible sectors. Evergrande’s problems could be a test case of Beijing’s desire and ability to manage every facet of the growing economy.

A man walks past a banner promoting the Emerald Bay housing project in Hong Kong amid news that the developer is on the verge of collapse. (Lam Yik / Bloomberg)

Bank of Montreal economist Art Woo said in a statement Friday that he also doubts a bailout will come. “Who could bear the losses is honestly difficult to predict, but we think it is reasonable to assume that the authorities are unlikely to bail out shareholders or creditors to keep moral hazard from increasing and improve financial discipline,” he said .

Organized processing is more likely in order to keep the damage as low as possible. “We don’t think the government has any incentive to save Evergrande (which is a private company),” Nomura analyst Iris Chen said in a customer note.

“But they will not actively push Evergrande down and from our point of view monitor a more orderly default, if at all.”

CLOCK | CBC reported on China’s “ghost towns” of empty towers nearly a decade ago: CBC’s Adrienne Arsenault explains how empty skyscrapers are casting shadows on Canada’s economy. 2:31

Are there any effects outside of China?

Not much, right, although Evergrande has assets in Europe and North America – including the posh Château Montebello resort in Quebec – but the company’s troubles are nonetheless a warning to people everywhere.

China has been in a real estate boom for more than two decades as more and more people are investing money in residential real estate – almost regardless of the price or demand for the underlying asset.

The video went viral on social media this month when a 15-tower condominium in Kunming was blown up for being a ghost town with no real residents, eight years after it was built.

While it wasn’t an Evergrande project, the concern is that there are plenty of others out there who like it.

Again the breathtaking demolition videos showing the oversupply of housing in China: 15 skyscrapers in China, which were part of Liyang Star City’s Phase II project, have just been demolished after standing unfinished for eight years because there was no demand from the market . pic.twitter.com/UByqjk8QXX

– @ Jon_Hartley_

China’s Lehman Brothers Moment?

The 2009 financial crisis was triggered by the collapse of two investment banks, Bear Stearns and then Lehman Brothers

That may be far-fetched for the economy as a whole this time around, but it is certainly on the table for the Chinese housing market at least.

“Lehman [was] Quite different from the way it slipped through the financial system and frozen activity, “said Patrick Perret-Green, an independent London analyst.

“Millions of multi-party contracts, each trying to determine their risk,” he said. “With Evergrande, it’s depressing the entire real estate industry.”

“There are other developers who have the same lack of access to liquidity problem and have expanded too much,” Lowy said.

Simon MacAdam, an economist at Capital Economics, believes the Lehman parables are unjustified.

“The story of the Lehman moment in China is far from it,” he said. “Even if it were the first of many property developers to go bankrupt in China, we suspect it would be a political misstep for it to result in a severe slowdown in its economy.”

Regardless, the Evergrande saga is a cautionary tale about the downside of unrestrained property speculation everywhere.

As Woo put it, “Default or bankruptcy doesn’t pose a Lehman-like threat … but it’s still bad news for the economy.”

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Real estate commission structures do need changing

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Earlier this month the editors of the Boston Herald called on the National Association of Realtors to amend a number of rules that they believe are anti-competitive and are designed to keep real estate commissions artificially high.

In response to the editorial, NAR President Charlie Oppler pointed out that commission rates have steadily declined in recent years. The consequence of this decline, according to Oppler, is that the commissions are fully negotiable, which suggests that agent compensation is not anti-competitive. However, a closer look at the commission data actually supports the opposite conclusion; namely, that there is substantial evidence that the current commission structure is against antitrust law.

When analyzing real estate commissions, it is important to recognize that the total real estate commission consists of two components: the broker’s commission and the buyer’s commission.

Because listing agents negotiate their commissions directly with sellers, there are no anti-competitive concerns with this component of total commission. However, this is not the case with the brokerage commission because the brokerage commissions do not negotiate their commissions directly with their buyers like they would in any other industry. Instead, the NAR rules stipulate that when listing the home, the seller must offer a preset, non-negotiable commission to the buyer’s agent who mediates the buyer.

This means that the buyer’s brokerage commission is not dictated by free market forces when the price of a service equals the value of the service. Instead, it is determined by how high the buyer’s commission is in the respective market. This notion of a common price exists because most sellers either from experience or from their brokerage agents know that offering a lower brokerage commission to the buyer would encourage brokers to illegally distract their customers from their offers and towards properties with higher commissions .

The declining commission data referenced by Oppler emphatically supports this characterization of real estate commissions. According to industry news site RealTrends, the average national commission rate has fallen from 5.40% in 2012 to 4.90% to 4.94% in 2020. (For simplicity we assume it is 4.90%.)

However, as explained above, we have to split the total commission into the broker’s commission and the buyer’s commission. According to a Redfin study, the average brokerage commission fell only slightly from 2.8% in 2012 to 2.7% in 2020. It can be deduced from this that the average brokerage commission fell from 2.6% to 2.2% during this period – four times the decrease in the buyer’s average brokerage commission.

It should come as no surprise that the average brokerage commission has dropped significantly over this period. First, the number of active brokers increased by 46% from nearly one million to nearly 1.5 million between 2012 and 2020. It is to be expected that this increasing competition will put pressure on commissions. Second, the average home sale price rose 23% (adjusted for inflation) over this eight year period, more than offsetting the decline in average listing commission. Finally, the increasing adoption of technological tools such as electronic signature software has helped streamline the process.

Therefore, the sharp drop in the average brokerage commission is an indication that free market forces are at play on the listing side. If this were the case on the buy side, we would expect a similar decline in the buyer’s average brokerage commission as the trends described above affect both sides of the deal. On the buy side, the decline is even more dramatic as buyers increasingly find their new homes on real estate websites like Zillow and realtor.com.

The fact that the buyer’s average brokerage fee has changed little since 2012 therefore supports the argument that the buyer’s brokerage fee is dictated by an arbitrary rate rather than free market forces.

Will Fried is a data scientist at REX.

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Fall Real Estate: Tri-Valley market shifting as 2021 comes to an end | News

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Tired homebuyers looking for a break can look forward to something in Pleasanton in 2022.

Buyer behavior changed in the second half of 2021 and is likely to continue into next year, said Tina Hand, 2021 president of the Bay East Association of Realtors.

“In general, homebuyers find less competition when they bid on real estate,” said Hand. “Many buyers are still a bit tired; they have been on the market for a long time and have been much outbid.”

She explained that historically high sales prices have taken their toll and there are simply fewer buyers in the market. Hand said buyers “are still waiting for prices to fall further despite we’ve seen price adjustments.”

The number of pending sales in Pleasanton peaked at 87 in April and then stabilized in May, June and July. Pending sales fell to 57 in August and then to 54 in September. This trend suggests a decline in buyer enthusiasm, which is also reflected in sales prices.

From August through September, the average retail price for a single family home in Pleasanton fell from $ 1.79 million to $ 1.56 million. This change was just one of the few times in 2021 that sales prices dropped month on month.

Hand said buyers are pulling out and sellers are not used to that. When asked how the sellers are reacting, Hand said: “I think they are a bit surprised that in August and early September they are not getting the prices we saw the market is shifting.”

“Sellers had received 15 or 20 multiple bids that were $ 200,000 to $ 400,000 above the asking price, and that doesn’t happen,” she said.

According to Hand, changes in the total cost of living are dampening buyer enthusiasm.

“People are starting to see fuel prices go up, food prices go up. I think that’s another factor in why people might be backing off a bit,” she added. “We have inflation going on and I think that scares people. First-time buyers in particular are a little nervous and will wait and see what happens.

The monthly price changes from August to September are surprising, but do not yet indicate a major shift in home sales prices. The average sale price for a home in Pleasanton in 2020 was just over $ 1.25 million. From January to August 2021, the average retail price was more than $ 1.6 million.

Hand said: “There is talk of a ‘housing bubble’ but the factors are just not there; this is not 2008. What happened then will not happen in 2021.”

Looking ahead, Hand said buyers should be positive with potentially more options. “More inventory in the market will help home buyers moving up or down or first-time home buyers – whatever the case.”

When asked when the 2022 real estate season will start, Hand predicted, “I bet it will start in late December or mid-January. that will make a difference in both residential and commercial real estate. “

Editor’s Note: David Stark is the public affairs and communications director for the Bay East Association of Realtors, based in Pleasanton.

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Shaq Sells Florida Mansion For 60% Less Than He Originally Sought

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After three years, five agents, and several price cuts, the NBA legend is Shaquille O’Neal has finally made a sale of its longstanding Florida property.

A deal for the huge estate known as Shaq-apulco was sealed for $ 11 million. That was 33% less than the last April list price of $ 16.5 million.

In 2018, Shaqs Spread hit the market in Windermere, FL for a whopping $ 28 million. Months later, the price was lowered to $ 22 million.

The waterfront retreat returned to the market in 2020 with a new marketing strategy and a new price of $ 19.5 million before being dropped again earlier this year.

Ultimately, the property was sold for 60 percent of the original, soaring asking price.

O’Neal realtor Benjamin Hillman of Premier Sotheby’s International Realty explained what made buyers decide and said through a representative, “It was the amenities and expansive lakeside setting that did it.”

He did not want to comment on the selling price.

The huge mansion, which the athlete bought for $ 3.95 million in 1993, has been modified down to the smallest detail. That turned out to be a certain hurdle for buyers.

New listing agent, new strategy

Hillman, the fifth agent to oversee the listing, spoke to us back in April about his revamped sales strategy. His goal: a lot less Shaq.

“I watched this house for over three years and they all walked down the same street, from Shaq, Shaq, Shaq,” Hillman told us about the strategy of previous agents. “But I want to take him out of the picture. I asked that any Shaq items that could be moved be moved. “

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This was a challenge given the “S” branding throughout the 31,000-square-foot interior, sports field, and oversized, custom-made furniture tailored to fit the 7-foot-1-inch star.

However, Hillman really managed to clear out a lot of Shaq’s belongings. In addition, the interior walls were painted white and many rooms were newly staged.

As the photos illustrate, references to Shaq remain: the diesel truck mural, the cinema decorated with Superman, and a similarly branded motor show. The “S” is even engraved in a glass shower door. The indoor basketball court still has Shaq’s name on the hardwood.

Trophy home

Unsurprisingly, Shaqs Spread has everything a superstar could need. The spacious interior offers breathtaking perks anchored by a 1,170 square foot two story great room with a marble fireplace and glass walls.

For entertainment, the manor house offers a cigar room, an aquarium room, a home theater, a games room, a dance studio, an office and a wine bar.

The master suite includes a 900 square meter sleeping area, two bathrooms and four closets.

Luxurious landscape

Despite its highly adapted furnishings, the property offers elements that every luxury buyer will appreciate. The 4 acre area overlooks Lake Butler and offers 700 feet of lakefront.

In addition, the royal residence is in the gated golf club community of Isleworth.

The resort-like facility is certainly a selling point. There is a 25m long and 4.5m deep pool with a custom rock waterfall. A summer kitchen, tiki-style cabana, and hot tub are also part of the package.

A covered boat dock with seating area is equipped with an electric boat lift.

O’Neal, 49, has long since left this huge mansion.

After a 19-year career, he retired from the NBA in 2011. He spends more time in Atlanta, where he works as an analyst for Inside the NBA on TNT.

Benjamin Hillman with Premier Sotheby’s International Realty represented O’Neal. Rob Rahter, a broker partner and specialist in luxury real estate for the Stockworth Realty Group, represented the buyer.

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