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Can The Evergrande Crisis Affect The Spanish Real Estate Sector

The crisis of Evergrande, the second largest Chinese developer, has set off all the alarms in the financial markets, coining the name of ‘Chinese Lehman’. But, does the Spanish real estate sector have to worry about the possible bankruptcy of this Asian colossus?

Although at first the markets reacted negatively, the truth is that different analysts from firms such as A&G or DWS point out that the Evergrande crisis “is not a systemic risk event” , nor is it a fact that has taken by surprise to the Chinese government, which had already shown its concern about the possible bubble in the housing market.

In fact, this crisis has been induced “mainly by government regulatory measures introduced in August 2020,” explains Diego Fernández Elices, General Director of Investments at A&G Banca Privada.

These are three red lines that oblige developers to, firstly, “keep their indebtedness below 70% of the value of their assets.” “The second is that they have sufficient cash to cover the short-term payments of their bank debts and the third requirement is that the debt does not exceed the amount of capital,” explains Mikel Echavarren, CEO of Colliers.

Evergrande was not able to stay within these three limitations and the truth is that the figures managed by the company are impressive if we compare them with the numbers left by the 2008 crisis in Spain. Specifically, the Asian firm has a total debt of 300,000 million dollars and last week it announced that it will not be able to repay a loan that expires tomorrow.

“Evergrande’s debt corresponds to about 40 times the debt of Martinsa Fadesa in the previous crisis and it is also approximately the same level of indebtedness that the entire Spanish real estate sector had with the banks in 2008”, Echavarren points out.

Thus, the manager emphasizes that it is “a potential crisis of colossal size, which would affect 1.5 million customers, and taking into account the implications that it may have for Chinese banks and without forgetting that it is a communist country and intervened It seems reasonable to think that the government will not drop this giant in a disorderly fashion. ” “Taking this into account and that the impact of an orderly restructuring should be less, we believe that it will be limited to the Asian market and should not significantly affect the financial markets or the Spanish real estate market”, highlights the CEO of Colliers.

Solid balance sheets in the sector
On the other hand, the Spanish real estate sector is currently in excellent health, which would be a positive point according to Aleix Amorós, geopolitical analyst and external advisor to a Spanish investment fund.

“I believe that the Spanish real estate sector is well positioned and has taken good note of the excesses of the past. Its leverage ratio is at manageable levels , and the ongoing promotions, contrary to what happens to Evergrande, are located in cities and areas with a high commercial return “.

In fact, the analyst considers that the crisis of the Asian colossus could even have a positive effect on the brick of our country. “There is beginning to be a general contagion in the Chinese Real Estate sector, with names such as Sinic Holdings, Fantasia Holdings or China Aoyuan. If access to credit is diminished as a result of the Evergrande crisis, there will be a halt in execution of ongoing promotions, which in turn will cause falls in the main raw materials associated with construction due to lack of demand, such as iron ore. This could positively impact the margins of Spanish developers. “

In this sense, the analyst and economic consultant Gonzalo Bernardos, highlights that “the Chinese economy will buy much less raw materials from the world and this will lead to a drop in inflation and therefore the rise in interest rates will be further away”

“It hurts certain countries like Germany and others that have a lot of trade with Southeast Asia, but it hurts Spain relatively little and only indirectly. But what it is going to gain from the lowering of rates exceeds what it can lose through trade. “, highlights Bernardos.

On the other hand, Amorós, puts on the table the reduced weight that the Chinese client has in the Spanish real estate market. “Barely 11.3% of home purchases were made by foreigners in 2020, and among these the British, Italians, Romanians and Moroccans stand out above all. The weight of Chinese capital in our real estate market is practically residual.”

Therefore, Amorós concludes that “unless there is a generalized collapse, which covers multiple areas of the Chinese economy and this ends up having an impact on consumer confidence on a global scale, a significant impact for the Spanish real estate sector could not be expected” .

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