The real estate industry is a driving force for economic development. In recent years, however, under the policy guidance of “real estate purchase restriction order” and “housing is for living in, not for speculation”, China has carried out continuous regulation on the real estate industry, greatly reducing the capital flowing to the real estate sector. In the development and adjustment of the real estate industry, the lag of market regulation and the internal competition of the real estate industry have increased the risk of non-performing real estates.

Causes of Non-performing Real Estates

1. Unauthorized and Illegal Construction of Real Estates

As specified in the Urban and Rural Planning Law, illegal buildings can be divided into the following six categories: (1) Buildings without a construction project planning permit; (2) Buildings that are not constructed in accordance with the provisions of the construction project planning permit; (3) Temporarily constructed buildings without approval or non-compliant with the approved contents; (4) Temporary buildings and structures not demolished beyond the approval period; (5) Buildings constructed on farmland in violation of the overall plan for land utilization; (6) Rural houses built on illegally occupied land by rural residents without approval or with approval obtained by deception. If the local real estate developers fail to observe the above regulations, they won’t be able to obtain the project approval document and sales certificate as scheduled. Unable to obtain cash flow through sales, the developers cannot pay for the project and bank loans, which eventually leads to the formation of non-performing real estates.

2. Claim and Debt Disputes of Real Estates

Generally speaking, real estate projects invested by private enterprises are more prone to disputes over claims and debts. Private enterprises obtain the right of real estate development through bank loans, bond issuance, private lending and financing. A low sales volume in the later period will result in the non-recovery of the project funds, and creditors will choose to take the enterprises to court as they cannot recover the principal. The court will seize the real estate project, resulting in the shutdown of the project and sales discontinuation, and eventually forming non-performing real estates.

3. Market Risk of Real Estates.

The real estate market supply and demand changes will form short-term market risk. If the quantity of real estates in a certain region has shown a trend that the supply exceeds the demand, the industry will be stuck of destocking in the next few years. If the excessive real estates cannot be transformed in time, they will become non-performing real estates due to the slow cash recovery speed.

4. Inadequately Performing Real Estate Developers

For real estate developers, the most important production and operation links are market positioning before project decision-making and marketing after project implementation. Accurate market positioning and active marketing strategies are the prerequisite for the success of real estate project development and operation, and both of these links require real estate developers to deliver a good performance in market research, product design, operation and sales channels. Inadequately performing real estate developers as reflected in inaccurate market positioning will lead to poorly-defined target customers and poor sales, thus affecting capital turnover or even resulting in project failure.

Disposal Methods of Non-performing Real Estates

1. Securitization of Non-performing Assets

Asset management companies can collect receivables and other assets in real estate projects that lack liquidity but have a stable cash flow, and sell them in the secondary market by means of internal and external credit enhancement, so as to form capital transaction and circulation. This disposal method converts the original non-performing real estates into securities available for market trading, and releases capital by increasing capital liquidity, which can effectively avoid the risk of real estate project failure.

2. Restructuring of NPLs

Restructuring of real estate NPLs is an important means to quickly dispose of non-performing assets. For real estate developers with normal production and operation and difficulties in short-term capital recovery, asset management companies can carry out negotiation on the change of performance with them, and implement real estate loan restructuring by changing the borrower, adding guarantors and increasing collateral. Asset management companies can carry out overall debt restructuring through the acquisition of claims, advance the follow-up resumption of the project, and enhance the repayment ability of the project.

3. Revitalization by Bringing in Incremental Funds

For small and medium-sized private real estate developers with a good credit rating, commercial banks can negotiate to involve asset management companies in real estate project financing before their loans are subordinated. Commercial banks can inject a certain amount of working capital into real estate projects under a strict control of loan size, so as to revitalize the NPLs of banks in the real estate business and finally resolve the risk of non-performing real estates.

4. Introduction of New Construction Units

For non-performing real estate development projects caused by construction interruption, asset management companies can introduce new construction units for non-performing real estate developers under reasonable and compliant conditions. The new construction units may agree with the original developer to offset the subsequent construction project funds of the non-performing real estates with the completed projects, so as to complete the continued construction of the non-performing real estates.

5. In-kind Debt Repayment

Asset management companies can negotiate with the real estate developer to collect the advantageously located real estates with value maintenance and appreciation capabilities from the real estate enterprises as the debt assets. Asset management companies can give priority to collecting the residential real estates available for sales with title certificates and no defects over commercial real estates for real estate disposal for cash in the shortest time possible.

6. Transfer of Non-performing Claims

Asset management companies can sell non-performing claims involved in real estate projects in a “sell-out” manner according to the market price, strictly abide by the institutional provisions of the Civil Code, and conduct open and fair transactions to reduce legal risks and moral risks in the process of transfer.

Generally, non-performing real estates are mainly formed due to legal factors, credit factors, market factors and industry factors, and can be effectively disposed off by injecting revitalizing funds, enhancing capital liquidity and shortening capital realization cycle. Rational disposal of non-performing real estates can safeguard the rights and interests of creditors and improve the utilization rate of social resources, generating positive economic and social benefits.