Evergrande and Real Estate Value Subjectivity

Abstract

The world press has been rife with stories about Chinese housing developer Evergrande, and their probable inability to make do with their excessive debt payments. Evergrande, a top five Chinese housing developer, participates in a housing market that accounts for almost 30% of Chinese GDP. Currently, Evergrande has more than 800 projects spread among cities of all sizes in China. Unfortunately, construction has recently ceased on 500 of those projects as the firm has run into liquidity issues. One might question how this could happen, as housing demand in China has remained lightning hot. In fact, Evergrande had pre-sold 1.2 million homes in advance of completion. The unprecedented demand for housing has led to record home prices in China, a phenomenon also witnessed in Korea, Japan, India, and Australia. The increase in home prices should be familiar to Western audiences, as this same story has been told in numerous markets in Europe and North America recently. After almost two years of work from home owing to the pandemic, housing has never been more important. Unfortunately, at least in China, the concomitant rise in income has not kept pace with the increase in housing prices, causing the size of the Evergrande starter flat to continually shrink. As Chinese home buyers reach for that buoyant euphoric future, the resultant first home has increasingly resembled a smaller version of itself. If housing demand was not the problem for Evergrande, what was? After the company went public in 2009, the ensuing decade saw loose credit and low interest rates, which allowed the firm to expand their empire via land acquisitions. For a housing developer, the first step in housing construction is often land purchases. Then, the firm can decide on what type and how many homes can be constructed based on local zoning ordinances and housing aesthetical and affordability considerations. As the credit enabled land acquisition binge was unfolding, Evergrande diversified into a dizzying array of unrelated businesses including electric vehicles, bottled water (as marketed by Jackie Chan), online car sales, an amusement park, and even a majority investment in the Guangzhou football club. These competing business interests, along with the accumulation of over 570 billion yuan of interest-bearing debt, have brought Evergrande to its current predicament. How these issues compounded into the impact on housing construction is evidenced by 60% of the firm’s assets now consisting of unbuilt/unsold properties. In order to move JOURNAL OF ASIA-PACIFIC BUSINESS 2022, VOL. 23, NO. 1, 1–4 https://doi.org/10.1080/10599231.2022.2052448