On the back of the recent stresses in the Chinese real estate market, HSBC estimates that the high yield property sector will see $10.1bn of defaults in 2023 vs. a record $63.7bn in 2022. Beginning with owner protests against stalled projects and mortgage boycotts, China tried to ensure that builders could deliver pre-sold flats to buyers. Pre-sales are a major modus operandi where a buyer’s contract is signed, following which the down payment and mortgage loan goes into an escrow account. While developers can only access the money once construction is completed, some have taken such deposits away for other purposes and have stalled projects. Due to this, local governments have now tightened scrutiny on pre-sales and cut-off access to these escrow accounts.
This has led to names like KWG citing the lack of access to its escrow accounts for being unable to pay its bonds due, ultimately leading to a default on its local bond. HSBC notes that credit risks now remain high for China SCE and Central China Real Estate amongst others.
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