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Real Estate Developers welcome govt’s takeover of Unitech

NEW DELHI: Leading developers across the country have largely hailed the government takeover of beleaguered realty developer

Unitech

even as some were caught by surprise. The ministry of corporate affairs that initiated the takeover over alleged mismanagement and persion of funds on Friday.

Gaursons India’s managing director Manoj Gaur feels the move will send a strong message to the corporates that they will have to shape up and that you can’t mess with thousands of buyers.

“For the first time such a harsh step has been taken in the real estate sector,” said Gaur, who is also president of Credai-NCR. Credai, or Confederation of Real Estate Developers’ Associations of India, is the apex body of private real estate developers associations. He added that it’s an inpidual case and does not reflect on the whole industry.

“Still it’s a big company and its actions malign the image of the whole sector. Even the developers that are doing well are being painted with the same brush.”

Expressing confidence in Real Estate (Regulation and Development) Act, 2016 (RERA) — that seeks to protect the interests of home buyers — Gaur said that now only serious players will be left as an entry barrier has been created with the stringent clauses. Under, RERA, developers will find it difficult to pert money as 70% of funds will have to be maintained in a separate escrow account.

In 2009, the government had taken over the reins of

Satyam

Computer Services citing financial mismanagement by its founder Ramalinga Raju.

ATS’ and Credai chairman Getamber Anand, said there were delivery issues with the realtor but he isn’t sure whether the government takeover is the solution.

“I don’t know the details of the cause of the takeover. Once we know the reason it will be better to comment. But there is a question mark on the efficacy of the decision. The same thing happened to Satyam a couple of years back. But I don’t see this as a trend. It is not practically possible for the government to take over all failing developers,” added Anand.

Some 19,000 home buyers across India have been left in the lurch by indebted developers such as Unitech and Jaypee Infratech after a slump in sales made them to either go slow or stop construction altogether.

Based on talks from independent consultants it is clear that the government wants to instil the confidence back among the investors specifically and the public at large.

Hiranandani Group’s managing director Niranjan Hiranandani said while the intention of the government is very positive — that it must protect consumers — the problem of liquidity crunch of developers too must be addressed. “We need to create a via media to generate liquidity for developers in dire need,” he said.

“I do not know if takeover of projects is the solution. For the reason that after taking over, they will have get the projects completed,” added Hiranandani.

Raheja Developers’ CMD Navin Raheja said the company doesn’t want to comment on the issue but felt the solution can be found if all the stakeholders are brought together and a detailed discussion is held to focus on delivery of the project may be through an escrow mechanism provided it’s mutually agreed between all the stakeholders.

Unitech has defaulted on payment of Rs 600 crore to more than 15,000 small depositors.

Evergrande gave workers a choice: Loan us cash or lose your bonus

When the troubled Chinese property giant Evergrande was starved for cash earlier this year, it turned to its own employees with a strong-arm pitch: Those who wanted to keep their bonuses would have to give Evergrande a short-term loan.

Some workers tapped their friends and family for money to lend to the company. Others borrowed from the bank. Then, this month, Evergrande suddenly stopped paying back the loans, which had been packaged as high-interest investments.

Now hundreds of employees have joined panicked homebuyers in demanding their money back from Evergrande, gathering outside the company’s offices across China to protest last week.

Once China’s most prolific property developer, Evergrande has become the country’s most indebted company. It owes money to lenders, suppliers and foreign investors. It owes unfinished apartments to homebuyers and has racked up more than $300 billion in unpaid bills. Evergrande faces lawsuits from creditors and has seen its shares lose more than 80% of their value this year.

Regulators fear that the collapse of a company Evergrande’s size would send tremors through the entire Chinese financial system. Yet so far, Beijing has not stepped in with a bailout, having promised to teach debt-saddled corporate giants a lesson.

The angry protests led by homebuyers — and now the company’s own employees — may change that calculus.

Evergrande is on the hook to buyers for nearly 1.6 million apartments, according to one estimate, and it may owe money to tens of thousands of its workers. As Beijing remains relatively quiet about the company’s future, those who are owed cash say they are growing impatient.

“There isn’t much time left for us,” said Jin Cheng, a 28-year-old employee in the eastern city of Hefei who said he put $62,000 of his own money into Evergrande Wealth, the company’s investment arm, at the request of senior management.

As rumors rippled through the Chinese internet that Evergrande might go bankrupt this month, Jin and some of his colleagues gathered in front of provincial government offices to pressure authorities to step in.

In the southern city of Shenzhen, homebuyers and employees crowded into the lobby of Evergrande’s headquarters last week and shouted for their money back. “Evergrande, give back my money I earned with blood and sweat!” some could be heard yelling in video footage.

Jin said employees at Fangchebao, Evergrande’s online platform for real estate and automobile sales, were told that each department had to put monthly investments into Evergrande Wealth.

Evergrande did not respond to a request for comment, but the company recently warned that it was under “tremendous” financial pressure and said it had hired restructuring experts to help determine its future.

Things were not always this way.

For more than two decades, Evergrande was China’s largest developer, minting money from a property boom on a scale the world had never seen. With each success, Evergrande expanded into new areas — bottled water, professional sports, electric vehicles.

Banks and investors happily threw in money, making a bet on China’s growing middle class and its appetite for homes and other properties. More recently, real estate has come under scrutiny from Chinese regulators who want to end the go-go years of the boom and have forced the industry to start paying off debt.

The idea was to reduce Chinese banks’ exposure to the property sector. But in the process, the regulators took away the money that developers like Evergrande needed to finish building houses, leaving families without the homes for which they had already paid.

“The Chinese financial system is really complex, and when you see fissures like this, you realize the impact it could possibly have on society,” said Jennifer James, an investment manager at Janus Henderson Investors. “If Evergrande were to disappear tomorrow, it could be a socially systemic issue.”

James and other investors said they learned about Evergrande’s wealth management strategy involving its employees only this month, when the company disclosed that it owed $145 million in repayments.

Evergrande has tried to sell off parts of its vast empire to raise new funds but said last week it was “uncertain as to whether the group will be able to consummate any such sale.” It accused the news media of triggering a panic among homebuyers with negative coverage.

But Evergrande’s funding channels started drying up well before last week. According to interviews with employees, state media reports and corporate documents seen by The New York Times, the company started forcing staff members to help bail it out as early as April, when it began peddling the short-term loans.

Around 70% to 80% of Evergrande employees across China were asked to put up money that would then be used to help fund Evergrande operations, Liu Yunting, a consultant for Evergrande Wealth, recently told Anhui Online Broadcasting Corp., a state-owned news group.

A version of that interview was taken offline Friday. Anhui Online Broadcasting did not respond to a request for comment.

The extent of the campaign and how much money it might have raised were unclear. Employees were told to each invest a certain amount of money in Evergrande Wealth products and that if they failed to do so, their performance pay and bonuses would be docked, employees told Anhui.

Company management said the investments were part of “supply chain financing” and would allow Evergrande to make payments to its suppliers, Liu said in his interview with Anhui. “Because we employees had to complete a quota, we asked our friends and families to put money in,” he said.

Liu said his parents and in-laws had invested $200,000 and that he had put about $75,000 of his own money into Evergrande Wealth.

Even before the protests last week, Evergrande was on Beijing’s bad side. Late last month, its executives were summoned to a meeting with regulators. Officials from China’s top banking and insurance watchdogs told executives to sort out their towering debt in order to maintain the stability of China’s financial market.

The biggest concern for authorities is Evergrande’s unfinished apartments. The company has nearly 800 developments in progress in more than 200 cities across China.

Evergrande, which often presold apartments to raise cash before they were completed, may still need to deliver as many as 1.6 million properties to homebuyers, according to an estimate from Barclays.

Under heightened scrutiny, Evergrande gathered its top executives earlier this month and asked them to publicly sign what it called a “military order” — a pledge to complete unfinished property developments.

Wesley Zhang and his family are among the hundreds of thousands of families who are still waiting for their apartments, and they hope the company will be able to deliver. Zhang, 33, joined the other homebuyers who protested in Hefei last week after he learned that Evergrande also owed money to its employees.

“Everyone is anxious. We are a bit like ants on a hot pan, having no idea what to do,” Zhang said, using a Chinese expression to describe the distress of watching a $124,000 investment potentially vanish. He said he hoped the protests would prompt the government to act before it was too late.

“We hope it will get the central government to pay enough attention,” Zhang said. “Then someone would come out to intervene.”

Evergrande crisis shows cracks in China’s property market

Angry homebuyers are waiting on as many as 1.6 million apartments. Suppliers that sold cement, paint, rebar and copper pipes are owed more than $100 billion in payments. Employees who were strong-armed into lending are panicking now that the company cannot repay them on time.

China’s Evergrande Group, the embattled property developer whose towering debt has set off panic in global markets, is buckling under the weight of more than $300 billion in debt. The company’s billionaire chairman told employees Tuesday that they would “walk out of darkness as soon as possible.”

But the question for many is whether the company can stumble out of its current crisis on its own without being led by Beijing. And experts are making increasingly grim predictions about Evergrande’s ability to hold on without a government bailout, and the consequences of a possible collapse.

A dire forecast about the company’s fate arrived Tuesday for investors in Asia, this one from S&P Global Ratings.

“We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” said the report, which was dated Monday.

Both the company’s shares and its bonds fell Tuesday, though by more modest amounts than in recent days and weeks. Its shares closed 0.4% lower, and shares of other Chinese-focused developers that tumbled Monday recovered some of their losses. Hong Kong’s Hang Seng Index, which fell 3.3% Monday, ended the day with a 0.5% gain.

A disorderly collapse for a company of Evergrande’s size could have ripple effects in the world’s second-largest economy and beyond, including scaring off investors who have bet billions of dollars on the company’s success. A panic may also damage China’s property market, a huge source of the country’s growth that is increasingly prone to heavy borrowing and erratic home prices.

“The officials still have some tools at their disposal to calm down the panic,” said Zhiwu Chen, a professor of finance at the University of Hong Kong, who predicted that the authorities would break up the company and sell its parts piecemeal. “They are under a lot of pressure to announce something soon.”

The effects of an Evergrande collapse would depend in large part on the attitudes of China’s top leaders.

For decades, China’s property market seemed to have no limits. Developers like Evergrande built cities from dirt, created jobs, gave the middle class something to pour their savings into and enriched local governments who sold them land. Along the way, it created economic growth that stunned the world. Now, prices have become too high and Beijing is trying to slow things down.

It is also trying to send a message that no company is too big to fail.

Many of Evergrande’s problems stem from new restrictions on home sales as Beijing tries to tame real estate prices and address rising concerns about the price of homes. The government has also sought to teach a lesson to developers that borrowed heavily in recent years to build more properties and finance investments in other businesses. (In the case of Evergrande, those include interests in electric cars and a soccer team.)

The possible default of a giant like Evergrande has put the vulnerability of China’s housing sector in stark relief. If the company were to fail, some experts say, it could cause panic across the property sector that could become harder for Beijing to control.

“If we’re in this downward spiral then without a credible intervention, we are going to see an awful lot of property developers getting into trouble,” said Michael Pettis, a finance professor at Peking University.

Evergrande has warned it is under tremendous pressure and has hired restructuring experts to help determine its future. It has an $80 million interest payment Thursday that it is likely to miss, which would cause more market turmoil.

While market observers once took as a given that Beijing would step in at the first sign of distress, rating agencies, banks and investors have all factored in a possible Evergrande default. Many now predict that Beijing will not intervene until other property developers begin to fail and pose a collective risk to the broader financial system.

Beijing has the tools to stop a financial disaster and keep a lid on the social discontent brewing around Evergrande. Its censors have already taken down dozens of videos of protesters who crowded company offices in cities like Hefei and Shenzhen last week. Its police have warned employees who tried to get the attention of local officials to lay off.

But it is Beijing’s authority over the country’s banks and biggest financial institutions that provides its greatest power. The government can force panicked creditors to cool off and order banks to give Evergrande the cash it needs to carry on or to take over parts of the business.

It also firmly controls the flow of money across the country’s borders, allowing it to stem a potential rush of funds outside the country.

Yet the longer authorities wait to bail out Evergrande, the more likely other developers will suffer as investors begin to question their assumptions about the broader sector.

Just like Evergrande, other Chinese property developers have huge debt piles and are being forced by regulators to pay them off under the “three red lines” rules that aim to limit the banking system’s exposure to property.

More broadly, the property market is starting to slow and industry practices that helped to juice sales and keep developers afloat — like preselling properties before they are completed — are coming into question. Regulators in at least two provinces announced new rules to crack down on illegal practices, including delays in delivering properties, misleading advertising or practices to manipulate prices.

The Hong Kong-listed shares of China’s other major developers have become the target of investor angst in recent days, as China’s stock market is on holiday. Sinic Holdings, a much smaller real estate developer, lost 87% of its value Monday before its stock was halted.

“The question is, how badly do they want to teach someone a lesson and how willing are they to have other people suffer because of that?” said Travis Lundy, an independent investment analyst based in Hong Kong.