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Presales powered resi development in China. Covid may change that

Tahoe Group has stopped construction on numerous projects, worrying homebuyers who dropped hefty deposits on units and who already took out mortgages

In China, residential developers have used presales to power their construction, but that may not be enough in a Covid world. (Getty)
In China, residential developers have used presales to power their construction, but that may not be enough in a Covid world. (Getty)

Presales are everything for residential builders in China, but in a coronavirus world, they may not be enough for one big developer.

Across China, the cash-strapped Tahoe Group has slowed or stopped construction on numerous luxury and mid-market residential projects, which is worrying homebuyers who already put down hefty deposits on units and even took out mortgages.

The company has fallen behind on bond payments and has pointed to the Covid-induced slowdown in the housing market as a financial stressor, according to the Wall Street Journal. Because of Chinese restrictions on the types of credit available, developers rely heavily on presales to help finance construction.

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Last year, presales made up the largest source of financing for developers in China, accounting for about a third of their funding. Relying on presales for funding means that developers could run out of cash to fund construction if sales slow, as they did during the pandemic.

Thousands of people who pre-purchased units at Tahoe Group projects are now imploring the developer to resume construction, the Journal reported. They’re worried that if the company abandons those projects completely, they’ll lose their investment.

Some have paid six-figure down payments and already have mortgages for their units. Stopping payment of a mortgage could mean a major hit to their standing in China’s “social credit” system, the report noted.
“We invested the savings of a whole family for a few decades to buy a house,” one homebuyer, Franklin Yan, told the Journal. “Now we may never get it, and our kids might be blocked from schools if we cannot afford the mortgage. Is this fair?”

Tahoe says it has resumed work at various construction sites. The overall Chinese residential market has picked up again, although there’s some concern of a looming bubble. Rents are also falling in some of China’s biggest cities amid a decrease in demand for apartments. The overall economic slowing brought on by the global coronavirus pandemic as well as China’s ongoing trade war with the United States are both impacting the apartment market in China. [WSJ] — Dennis Lynch 

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Coronavirus