China’s property sector is struggling to halt its unprecedented decline. The biggest developers have gone into default. What will happen to private equity that had enthusiastically bought into real estate during the euphoric years then, investors are asking.
The fate of Ping An Real Estate Co., the wholly-owned subsidiary of insurance giant Ping An Insurance Group Co., is igniting a lively debate. The PE firm’s 2 billion-yuan ($274 million) bond, due next January, went through a roller coaster ride in recent months, hitting a yield of 30% in late August.
As of the end of June, Ping An Real Estate — with 110 billion yuan in assets — held around 10 billion yuan in cash, allowing it to cover only about half of its interest-bearing debt due in the next 12 months. Over the last year, its business operations and liquidity positions have deteriorated rapidly alongside China’s property slump, with sales falling by more than half from their 2021 high.
But worrying investors the most is not what shows up in financial reports, but liabilities Ping An Real Estate might be on the hook for off its balance sheet. In late September, while processing the company’s application for a new corporate bond, China Securities Regulatory Commission said it noticed that the firm had concealed an overdue loan totaling 200 million yuan.
Ping An Real Estate routinely resorted to joint ventures for its investments, playing the minority shareholder role and giving out shareholder loans to the JV. This way, the private equity can be shielded from day-to-day operations — it is a financial firm, not a professional developer after all. In addition, these risky early-stage projects, along with their debt, don’t need to enter Ping An’s balance sheet.
For instance, Shenzhen Anchuang Investment Management Co., a 49%-owned associate, is an entity Ping An Real Estate frequently used for these JV projects. In 2022, loans to Anchuang alone totaled 17.8 billion yuan.
This form of investing became problematic when property values tumbled and developers fell into distress — as reflected by the securities watchdog’s recent inquiry into the overdue loan. It was regarding a JV project between Ping An Real Estate and Zhenro Properties Group Inc., which has defaulted on its bonds. Unable to collect a developer loan the JV had taken out, the bank started knocking on Ping An Real Estate’s door. In its response to the CSRC inquiry, Ping An Real Estate said the loan was collateralized and the underlying land value should be able to cover the overdue amount. In other words, it was not on the hook for repayments.
Ping An Real Estate can’t shirk responsibility indefinitely, however. For instance, since 2022, Anchuang has exited 27 investments; more than half were sold to Ping An Real Estate. Going forward, how much additional debt and how many low-return projects will the company have to bring onto its balance sheet?
A skeptic may say that Ping An Real Estate is so insignificant in the Ping An empire that its demise doesn’t matter. Real estate accounted for only 4.5% of its total investments as of the first half, down from 5.5% in 2021. A believer, meanwhile, might point out that there are so many business entanglements under the company umbrella that a default from Ping An Real Estate can send shudders through important subsidiaries, such as Ping An Bank Co.
Globally, as commercial real estate wobbles, investors are starting to worry about private equity, given the scope for future declines in property values. China is no exception. Ping An, in Chinese, means tranquility and safety. Ping An Real Estate, it turns out, is anything but. [Abridged]