What Led to Real Estate Giant Evergrande’s Implosion

Evergrande’s Implosion

Last week, China’s Fortune 500 Real Estate company Evergrande went into crushing debt. Here’s a look at the factors that contributed to it.

China’s second-largest property developer, Evergrande, is undergoing a severe liquidity crisis. The company’s shares are down 85% since January 2021, and they are US$300 billion in debt. In a bourse filing on September 14, 2021, Evergrande warned people of a possible liquidity crisis. It declared, “The company expects a significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the group, which would in turn place tremendous pressure on the group’s cash flow and liquidity.”

All of its unfinished housing projects have been halted. Plus, trading in its bonds has been restricted. Employees, homeowners and over 70,000 investors are protesting to get their money back at the company’s head office in Shenzhen. 

How did a company with over 200,000 employees and offices around the world end up in debt?

Evergrande’s many pursuits

In 1996, Hui Ka Yan founded Evergrande in Guangzhou. While it started as a real estate company, it expanded to other pursuits soon. These include electric vehicles, healthcare, streaming media services, TV and film production, food and mineral water, and life insurance. They also built a soccer school, and a stadium is underway. 

To realize their projects, they borrowed a lot of money from banks and investors during China’s economic boom. According to experts, that might have been a significant reason behind their downfall. . China’s Director of the Economist Intelligence Unit Mattie Bekink said that the group “strayed far from its core business, which is part of how it got into this mess.”

There are also other factors that have steered the company into debt. For one, Evergrande’s subsidiaries failed to repay wealth management products, such as bonds, equities and money market funds. These are a significant source of short-term funding for the company. This is made worse by the declining confidence of homebuyers. People are not willing to invest in Evergrande properties, ushering in more losses.

Lack of diligence, lots of dues

The company is US$300 billion in debt, and it is desperately trying to raise funds. Early this year, it asked employees to loan the company money or lose their bonuses. The employees loaned them money, but they never got repaid. Some protesters were heard yelling, “Evergrande, give back my money I earned with blood and sweat!” 

If that wasn’t enough, Evergrande owes a bond interest payment of US$669 million that is due this year.

Will this have a global impact?

According to the Senior Global Economist at Capital Economics Simon MacAdam, it won’t. He noted, “On its own, a managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence. Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.” 

However, the stock markets paint a different picture. In the aftermath of the Evergrande downfall, on September 21, 2021, the richest 500 people lost US$135 billion in wealth collectively. Tesla CEO Elon Musk’s net worth plummeted by US$7.2 billion to US$198 billion.

Other real estate companies are fearing contagion, worrying that Evergrande’s downfall will have a domino effect that will bring everyone down. The Director of Chanson & Co., a boutique investment bank, Shen Meng said, “As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector.” 

Ultimately, however, Bekink feels that the Chinese government will intervene and bail out the company. According to him, the nation will not allow the company’s defaults—failures to repay loans—to spread into the banking system.

The next steps

Evergrande has hired Houlihan Lokey and Admiralty Harbor Capital to evaluate the company’s condition. They will assess the capital structure and evaluate its liquidity. Accordingly, they will “explore all feasible solutions”. Evergrande’s downfall is a lesson for startups in looking after their financial health. To know more about making the right investments as a startup, check out this article.

Header Image by Flickr

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