Those of us old enough to remember past property booms and slumps in the UK, USA and elsewhere have been observing the Chinese property boom and wondering how it will end. 

Chinese developer Evergrande – possibly the world’s most indebted developer to date – has liabilities of over $300bn. Another developer Kaisa is reportedly in restricted default. Much of the Evergrande debt is international and it has borrowed heavily in the global bond markets. At the time I write Evergrande has about $19bn of outstanding debt payments and Kaisa about $12bn. 

The Chinese central bank has unleased $188bn of extra liquidity into the system in an attempt to steady investor’s nerves and Yi Gang, governor the Peoples Bank of China, in an attempt allay investor fears, has referred to Evergrande’s failure to meet international bond interest as a manageable market event and said the rights of bond holders will be protected. Quite how investors will be protected remains to be seen. 

Mortgage loans in China are provided by two types of lenders namely Banks and House Provident Funds (HPF). Six large banks dominate the market with about 75% of bank lending as residential mortgages mostly on new build developments and overwhelmingly flats. In the last few years there has been a massive increase in development throughout China with purchasers buying for both occupation and investment. 

Developers such as Evergrande have been selling off plan, frequently before construction has started, taking deposits from purchasers and buyers have been assured of available mortgage funds. The typical interest rate currently is around 4%. 

There has been a powerful speculative element involved in all this with many buyers purchasing multiple properties for investment. President Xi Jinping has expressed his concern and desire to cool the overheated property market but at the same time the central bank does not want to precipitate a market collapse by completely undermining consumer confidence. 

Evergrande was founded 25 years ago by Hui Ka Yan. As is often the case with large successful companies run by driven and powerful CEOs the business did not confine itself to buying land and building flats. On the back of a property boom and despite having land reserves enough to house 10 million people the company branched out. It planned a $7bn investment in electric vehicles, invested in theme parks and energy and bought Guangzhou F. C. China’s richest football club. The company proposed to build an artificial island off Hainan in the South China Sea to be called Ocean Flower Island at a cost of $15.5bn. 

Mr Hui was at one time described as the world’s richest man. He is still rich but he no longer controls Evergrande’s destiny as the company endeavours to restructure and seeks state support.  

Prospective purchasers of new build houses and flats who arranged mortgages and paid deposits for properties yet to be built have been demonstrating and demanding action. Against this background the Chinese property market is likely to take a hit and if prices fall then the mortgage lender’s security will be impaired.  

Property valuation for mortgage lenders in China may lack the rigour that we find with well- established professional surveyors as we have here in the UK or appraisers as they have in the US. In the case of newly built flats the valuation in China will invariably be the purchase price with a check to confirm that other similar flats in the development are selling new at the same level. If the market is overheated and prices are rising rapidly the Chinese property valuation will simply reflect market conditions. 

There has been a long history of debate amongst surveyors concerning the valuation of new build properties and especially flats when the price often includes various incentives and inducements and also includes what we surveyors call the “new-build premium”. In other words, if you buy a new flat and have to resell it say just a year later you are unlikely to get you money back and you may well be showing a loss. The resold flat will be second hand and lack the premium value. So the mortgage lending should be secured either against the resale rather than the new value or the acceptable loan-to-value ratio for new builds should be adjusted to reflect the additional risk. 

We now wait to see what happens to the Chinese property market and how prudent the mortgage lenders have been with their lending on new built flats. The current omens do not look very encouraging. 

Peter Glover is a surveyor and author of Building Surveys and Buying a House or Flat