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The collapse, the fear and the lesson from 2008: How will the real estate crisis in China affect us?

The collapse of Evergrand, one of the largest real estate companies in the world, could lead to a domino effect that creates great concern in the markets. Will the crisis reach us as well, and what can and should we learn from it? Nir Shmol, CEO of Snir, explains

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Thursday, 23 September 2021, 08:02 Updated: 08:08

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In recent days we have witnessed growing nervousness in international markets in the face of the danger of the collapse of the Chinese Evergrand company.

It is one of the largest real estate companies in the world, and the one that holds the largest debt in the world of all the companies in the market - a total of about $ 305 billion. ?

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Unfinished project in China, the main reason for the collapse of Evergrand (Photo: GettyImages)

The conduct of the Chinese avant-garde company in recent years

At the time, the company was forced to continue investing tens of billions of dollars in construction to meet its obligations to homebuyers, who made advances before construction began.

Due to this she was forced to increase her debts and the volume of her credit

To answer these questions, we must understand the main points of the crisis and the process that preceded it. In the last decade, the Chinese economy (similarly, by the way, to Israel and other countries in the world) has enjoyed an extraordinary real estate boom and a significant increase in demand for buying apartments along with an increase in apartment prices. In about 2000 local companies, including amusement parks, huge-scale real estate, cinemas, football teams, vehicles and more. The company is currently in the process of building about 1.5 million apartments in a large number of projects.

At the same time, Evergrand owns about 200 companies outside China, raising huge debt from banks and the public for land and property purchases.

In the last two years, we have witnessed a slowdown in the Chinese real estate market, which until then had been booming, which led to a 20 percent drop in the rate of apartment sales and left the company with huge inventories compared to declining demand, which also led to declining real estate prices.

At the time, the company was forced to continue investing tens of billions of dollars in construction to meet its obligations to homebuyers, who made advances before construction began.

Due to this she was forced to increase her debts and the volume of her credit.

When the Chinese government, through the central bank, demanded that the banks reduce their exposure to the real estate industry and slow down the provision of loans to the sector, the company was unable to obtain additional credit and is therefore currently in a state of insolvency.

What will the Chinese government do?

Now the question arises what will be the reaction of the Chinese government?

Will it allow the company to collapse, just as in the United States at the time the Obama administration allowed the collapse of Lehman Brothers, the largest private investment bank in the world at the time, or alternatively give it a protection net like the administration gave AIG just before its collapse.

The reason for this, by the way, was the domino effect that would have been created had this huge company collapsed.

This would have led to the collapse of many more companies and perhaps, God forbid, to the collapse of the world economy.

In the coming days we will see the answer to the question of how the Chinese government intends to behave towards society.

The crisis did not begin yesterday.

The stadium in Beijing, which was destroyed in August 2020, was a prelude (Photo: GettyImages, Greg Baker)

The growing economy in the world

The main concern in such a crisis is regarding the local and global banking system, which has provided the credit and the fact of insolvency against the banks, the stock market and local financial institutions which could collapse and thus lead to a global crisis.

This is because the contemporary global economy is global and the butterfly effect greatly affects every point on the globe in the event of a global collapse.

It is also important to understand that China is the world economy growing alongside India in the last decade, with the largest population, and holds most of the debt of the United States government and its financial entities.

Due to global impact policies, many Chinese companies own global real estate, ports, and entire industries all over the world. The collapse of the Chinese economy may, God forbid, have far-reaching implications for large parts of the global economy.

Physical, and also symbolic, collapse.

Demolition of the neighborhood in China

The impact on Israel

Regarding the impact on Israel - it should be understood that Israel is a very small part of the world economy, despite the massive import of goods from China, which affects the economy in Israel. Some of the goods that come to Israel from China are also related to real estate. These are many construction materials that come to Israel, along with tens of thousands of workers working in Israel, marinas and huge corporations like Tnuva held by the Chinese, which has also been criticized by the Biden and Trump in the past. Between the Americans and the Chinese, therefore, the impact of a collapse of the Chinese economy could also affect the Israeli economy in general and the real estate industry in particular.

In the extreme situation of the collapse of the Chinese economy, there is no doubt that we will also see a dramatic impact on the world economy, including Israel, but if it is a local impact, the Chinese government will support local markets (whether it gives a safety net to society or not). It can be assumed that the effect will be negligible if at all.

The Obama administration has allowed the investment house to collapse.

Lehman Brothers (Photo: GettyImages)

Food for thought in light of the upheaval in China

Nir Shmol (Photo: Tomer Feder)

In such a case, it is important to check and understand and learn about the Israeli companies operating in Israel in the field of real estate, and to monitor in a regulatory manner whether there are companies in Israel whose leverage is so high and therefore may endanger the Israeli economy, which is also based on real estate. Reaches 40-35 percent today of the economy in terms of GDP).

The concern is to such a significant level that the collapse of an Israeli company could endanger the banking system in Israel and, as a result, the Israeli economy as well.

It is necessary to analyze what will happen in the event of a decline in demand for real estate in Israel, where in the last 15 years the level of demand for real estate has risen year by year, and the rise in real estate prices is reminiscent of what is happening in China. In Israel.

Nir Shmol is the CEO of the Snir Real Estate Marketing Group.

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