Bust or buying opportunity?
In the new territories north of Hong Kong, a vast and lavish property development was planned: a wetlands restoration, hundreds of luxury townhouses, all surrounding the jewel in this property crown – a Palace of Versailles-themed villa of truly palatial size and ostentation.
If you want to know when you’ve reached the very pinnacle of a property market and bad things are about to happen, look out for the word ‘Versailles’.
The original, monumentally lavish Palace of Versailles sparked revolution and saw King Louis VI and Queen Marie Antoinette go from gilded halls to the guillotine. Then, at the very peak of the 2008 US property boom, construction stalled on the biggest house in Florida, modelled on the world-famous Parisian palace.
Now, this Chinese Versailles has been seized from the huge, debt-ridden property developers Evergrande by LA-based lenders Oaktree Capital. It has been obvious for some time that all is not well in the Chinese property market.
For years, property development has been a significant driver of the country’s economy. Apartment blocks were built across China, funded by large deposits or even full pre-payment, plus loans to the developers. They were constructed by the rapidly expanding Chinese, super-sized property companies. In 2019, property prices were enjoying double-digit growth and buying housing amounted to a national obsession, fuelled in part by strong underlying trends including urbanisation and rising wealth. Critically, property ownership was also seen as the primary means of wealth creation and preservation.
“Fuelling the fire were government policies which occasionally looked to stimulate real estate as a key counter-cyclical move”
Growth has been the mantra for Chinese real estate developers. The industry remains highly fragmented and developers learned in prior downturns that access to financing was often linked to their size and league-table ranking. Further fuelling the fire were government policies which occasionally looked to stimulate real estate as a key counter-cyclical move. Local governments were also benefitting as they generate 30% of their annual revenues from land sales to developers.
