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The country is dealing with its worst oversupply of unsold apartments in years

HONG KONG—China’s property market appears to have stabilized after a two-year downturn. But one problem continues to hold back its recovery: a major oversupply of unsold apartments.

China had 3.5 billion square feet of finished but unsold apartments in February, according to Wind, a data provider. That is equivalent to around 4 million homes, according to some estimates. It is also the worst oversupply in China since 2017, when it was in the midst of a “slum clearance” program meant to boost demand for new housing by tearing down old, dilapidated buildings.

Around a third of all newly completed apartments in 2022 were unsold, the highest percentage since 2015, calculations by property consulting firm China Real Estate Information Corp. show.

The overhang is most acute in smaller cities with populations of a few million people or less, economists say. After a long building boom, the more than 640 cities labeled as “third tier” in China now have nearly 80% of China’s total housing stock, according to a paper published last year by economists Kenneth Rogoff and Yuanchen Yang. Demand in those cities is weaker than in bigger markets such as Beijing and Shanghai, where populations and job markets have grown faster.

It would take nearly six years for one well-known third-tier city, Beihai, to absorb its stock of unsold homes, compared with seven months in Shanghai and nearly two years for Beijing, according to China Real Estate Information estimates.

On average it would take 20 months to absorb the excess housing supply in the 50 cities that China Real Estate Information monitors, the firm said. The U.S. currently has a 2.9-month supply of existing homes, according to the National Association of Realtors, and an 8.2-month supply of new homes, according to U.S. government data.

In February, new-home prices in “top-tier cities”—Beijing, Shanghai, Shenzhen and Guangzhou—rose 1.7% from a year earlier. Prices in third-tier cities dropped by 3.3%, though the pace of decline has slowed from previous months, according to data from China’s statistical bureau.

Overall, new-home prices across 70 major cities rose 0.3% from the previous month, after declining month-over-month since August 2021.

If China fails to stabilize home prices in its lower-tier cities, which are home to about two-thirds of China’s urban population according to one estimate, it will likely damp household confidence and consumers’ willingness to spend in many parts of the country, limiting the extent of China’s overall economic recovery this year.

In the longer run, the need to absorb the market’s excess housing could mean a prolonged period of depressed new-home construction, depriving China of one of its biggest growth drivers and job creators. New-home construction is also critical for China’s heavily indebted local governments, which rely on income from land sales to developers to balance their budgets.

The need for real-estate construction in third-tier cities will need to shrink by roughly 30% between now and 2035 to avoid further oversupply, Mr. Rogoff and Ms. Yang concluded in their paper in September.

Third-tier cities appealed to some property buyers before the pandemic because their home prices were typically much lower than in China’s bigger cities. Speculators swooped in from across China, in some cases snapping up multiple units and leaving them empty, expecting investment gains. Developers ramped up construction to meet anticipated demand.

But Beijing’s efforts to wipe out speculation have collided with unfavorable demographics and other problems in smaller cities to make them less attractive now.

In Beihai, a coastal city in southwestern Guangxi province known for its beaches and balmy climate, the dwindling number of travelers during the pandemic depressed sales, according to local property agents.

Average home prices in the city, nicknamed “China’s Miami” with a population of 1.9 million, fell to around $54 to $67 a square foot at the end of 2022, from around $108 to $121 in 2019, said a salesperson at a local property agency.

The lifting of China’s zero-Covid rules late last year brought tourists back into town during the Lunar New Year in January. Yet prices haven’t recovered to prepandemic levels, the salesperson said, because there are fewer speculative buyers.

One local resident who owns two properties said she isn’t counting on much of a rebound, though she believes people still want to move to the city.

“There has already been a glut of homes in cities like Beihai,” she said.

Owners in some other third-tier cities are pessimistic. Chen Yong, who owns two apartments in the northeastern city of Qinhuangdao, estimates that about 40% of the units in his compound are vacant, based on the number of apartments he sees with lights on at night, and how many homeowners are active in an online chat group.

“There are too many empty apartments out there,” said Mr. Chen, who works for a state-owned oil company. “I simply can’t see any reason for prices to surge anymore.”

Demand has snapped back quickly in some big cities, after many places in China lowered mortgage rates and offered other subsidies to attract first-time home buyers. In Shanghai, sales of existing homes rose to the highest level in February in seven months, according to data from Lianjia Research Institute.

Economists at ANZ Group said in a research report that China’s property sector was bottoming out, and that its gradual recovery would contribute as much as a half-percentage point to China’s gross domestic product growth in 2023, after dragging on the economy in 2022. It expects overall GDP growth of 5.4% in China this year.

ANZ said that even if the property recovery continues, annual sales will still likely only reach 90% of prepandemic levels.

Many forecasters believe the housing glut will persist in some cities, unless the government does more to stimulate demand, though doing so could lead to more speculation, which the government is reluctant to encourage.

Between 2010 and 2020, demand for residential properties in urban China averaged 18 million units a year, according to Goldman Sachs. As China’s population ages and demand for replacement properties wanes, that number will drop to 6 million units a year by 2050, its estimates show. In 2022, China’s urban population grew at the slowest pace in 42 years.

“We do think the peak has passed,” said Hui Shan, chief China economist at Goldman Sachs, adding that she expects annual demand for new homes to drop steadily in the coming decades.

The market could gradually absorb some of its excess stock if developers continue to scale back on launching new projects and give priority to selling existing units, said Betty Wang, a senior economist at ANZ Group. The temptation to increase construction as the market recovers could be strong, however.

Beijing could also try to reduce the oversupply by knocking down more old buildings and encouraging the renovation of existing units rather than building new ones. That wouldn’t be strange in China’s marketplace, said David Wang, head of Asia economics at Credit Suisse, because the average life expectancy of housing in China is only around 35 years, much shorter than in the U.S.

Sales went largely unnoticed by investors due to securities rules and filing method

Insiders at collapsed Signature Bank SBNY -7.16% sold more than $100 million of shares in the years after the bank pivoted to attract cryptocurrency companies and became a stock-market darling, according to a Wall Street Journal analysis.

Sales over the past three years by the bank’s chairman, its former chief executive officer and his successor accounted for about half of the amount sold, according to the Journal’s analysis of company filings. All three served on the board committee tasked with overseeing the bank’s risk profile over the past year.

The insider transactions at Signature weren’t widely known because of where they were filed and how the transactions were described in the documents.

New York regulators put Signature into receivership on March 12 after having “a crisis of confidence in the management team” during a run on its deposits triggered by the collapses of Silicon Valley Bank-parent SVB Financial Group SIVBQ 8.85% and Silvergate Bank days earlier. SVB and Signature were respectively the second- and third-largest bank failures in U.S. history after Washington Mutual.

Signature Bank didn’t reply to a request for comment. New York Community Bancorp’s Flagstar Bank, which will assume all of Signature Bank’s cash deposits, didn’t comment.

It was a steep and sudden fall for Signature, a nearly 22-year-old bank that was one of a small number of lenders to embrace the cryptocurrency industry. Cash from the sector helped drive up deposits by 68% in 2021 and launch the bank’s shares to a 140% gain that year. Insiders reaped $70 million from stock sales that year, selling twice as many shares as they did in 2020.

The executives sold many of their 2021 shares in the spring at around $220. The stock continued to rise throughout the year, hitting an all-time high of $366 in early 2022.

In a hearing last week, members of the Senate Banking Committee were critical of the bank’s executives, saying they sat by while risks at their banks grew unchecked.

Karen Petrou, managing partner at bank-consulting firm Federal Financial Analytics, said in an interview that someone at the bank should have called for a pause and asked, “‘Do we have the right kind of brakes for this speed? Can we steer the car?”

At Signature, the executives responsible for overseeing the bank’s risk were also champions of its courting of the crypto industry. That strategy focused on an internal payments platform called Signet that was used by crypto companies to manage their cash. Signature didn’t hold or lend cryptocurrency itself.

Chairman Scott Shay called himself a “crypto enthusiast” at a conference in 2022. It was Mr. Shay who had sketched out the initial idea for Signet by hand on a piece of paper that he kept framed in his office.

Mr. Shay also chaired the risk committee of the bank’s board of directors. He sold $5.4 million of stock in 2021, according to the bank’s disclosures. He sold almost none in 2020 or 2022. He also bought $1.5 million of shares over those three years, and around $644,000 in 2023, before the bank’s collapse, the disclosures show.

Joining Mr. Shay on the bank’s risk committee were Joseph DePaolo, the bank’s chief executive, and Eric Howell, its chief operating officer, who joined the board and risk committee last April. Mr. DePaolo sold $13.9 million of shares in 2021, the disclosures show. Mr. Howell sold $14.9 million that year, according to the disclosures. Messrs. DePaolo and Howell sold another $9.2 million shares between them in March of 2022, the disclosures show.

From 2004 to 2019, Mr. DePaolo sold shares most years around the same time, netting about $39 million. Mr. Howell sold about $23 million of stock over the same period.

All three men advocated for doing business with cryptocurrency companies and investors, according to speeches and other statements they made. At a conference in 2021, Mr. DePaolo talked of the bank potentially lending against crypto assets, an idea that was later scrapped.

The three had been at the bank since it launched in 2001 and suffered big losses on their stockholdings when the bank collapsed. On the last business day before it was closed, Mr. Shay’s equity stake was worth $35 million, Mr. DePaolo’s about $15 million and Mr. Howell’s about $3 million, according to company filings and the closing share prices the last day before the bank was seized.

Mr. Howell, Mr. Shay and Mr. DePaolo declined to comment.

The extent of the executives’ sales was hard to determine in part because Signature filed the documents with the Federal Deposit Insurance Corporation, rather than the Securities and Exchange Commission, which is typical for companies of its size.

Most banks of this size are regulated by and file the forms to the SEC.

Signature was one of only two companies in the S&P 500 that didn’t file insider-trading transactions to the SEC. The other was First Republic Bank, which was rescued by a $30 billion deposit by a group of large banks.

Filings with the FDIC typically escape notice from investors and services that track insider trades, according to professors who studied the disclosures. The FDIC website hosting the filings only allows filings to be viewed one at a time.

The bank also appeared to miscategorize some of its FDIC filings as dispositions to the company, meaning the shares were sold to the company, rather than sales on the open market. It isn’t clear why the sales were described this way, but the result was that they weren’t picked up by websites that track insider selling for investors. Investors closely monitor these sites for insights into executives’ views on their companies’ prospects.

Alan L. Dye, an attorney at Hogan Lovells and co-author of a book on disclosure rules for corporate insiders, reviewed a representative sample of Signature’s filings. He said he believed the reports don’t follow the instructions on the forms or the SEC staff’s position on how they should be filled out.

“At a minimum, the information they report, including the footnotes, make it difficult to determine the nature of the transactions,” he said.

Signature’s crypto bet soured in 2022 as some cryptocurrencies imploded and the price of bitcoin crashed. The company’s shares were dragged down with it, falling 64% on the year, while the bank’s deposits shrank by 17%. Signature’s price drop far outpaced the 15% decline in the SPDR S&P Regional Banking ETF over the same period. Signature Bank’s risk committee met four times in 2022, according to a company filing to the FDIC.

In December, Signature announced that it planned to significantly lower its exposure to the crypto industry. The bank had already lost billions of dollars of crypto-related deposits, the bank’s executives had said. In February, the bank announced that Mr. DePaolo would be stepping down as the bank’s president and chief executive officer. Mr. Howell was named as his successor.

Signature didn’t have the balance sheet losses that other struggling banks faced, but about 90% of its deposits weren’t insured by the FDIC, meaning customers had an incentive to flee. The crypto meltdown that began late last year dinged confidence in the lender. The demise of Silvergate Capital Corp., another bank that had bet on crypto, and the seizure of Silicon Valley Bank came before the collapse of Signature.

Signature’s executives continued to back the bank. Silvergate collapsed on March 8. That day and the next, Mr. Howell bought about $960,000 of Signature’s preferred equity.

On Friday March 10, regulators said they were closing SVB. Signature’s customers withdrew $18 billion from the bank—about 20% of the lender’s total deposits. The same day, Mr. Shay bought about $414,000 of shares, according to a filing.

Over the following weekend, withdrawal requests continued to pile up while the bank looked for a buyer or capital infusion. In the early evening of Sunday, March 12, the New York regulators said they were closing the bank and had removed its senior leadership. Equity holders, like the executives, were wiped out.

At the Senate hearing, Martin Gruenberg, chairman of the FDIC board of directors, told the committee that the agency was performing a required investigation into the banks’ directors and officers for their management and conduct that could result in civil monetary penalties, restitution or professional bans. The bank’s executives declined to comment.

Judge approves plan to end cosmetics group’s three-year fight with creditors over errant $900mn payment by Citigroup

Revlon will exit bankruptcy at the end of April after a federal judge on Monday approved its plan to shed $2bn in debt and end nearly 40 years of control by billionaire investor Ron Perelman.

The US cosmetic group’s lenders will take control of Revlon’s new equity. Shareholders, including Perelman, who acquired the company via a 1985 hostile takeover and controlled 85 per cent of the stock, will be wiped out. Perelman’s daughter, Debra, will stay on as chief executive of the company, which also owns Elizabeth Arden, Juicy Couture and Almay, saw its market capitalisation reach as high as $2bn in 2015.

Judge David Jones of the federal bankruptcy court in New York on Monday described the settlement agreement as a “remarkable achievement” adding that creditor recoveries would be “better than anticipated”.

The cosmetics group filed for bankruptcy protection in June 2022 in the middle of a supply chain crunch that was exacerbated by the fallout from a 2020 administrative error in which Citigroup mistakenly wired $900mn of the bank’s own funds to Revlon lenders.

When some of those creditors refused to return $500mn of the money, the resulting legal dispute hampered Revlon’s ability to negotiate for a cash infusion and forced it to seek bankruptcy protection. A federal appeals court eventually ordered the recalcitrant recipients to send the money back to Citigroup.

Under the bankruptcy plan approved by Jones, senior lenders to Revlon will receive 82 per cent of its new equity and the junior lenders the rest. The company’s new equity, which is to be privately held, is to be set at $1.6bn, making its enterprise value, including debt, $3bn.

The group of creditors who were accidentally repaid by Citigroup and forced to return the money will end up with equity worth roughly 20 cents on the dollar of their existing claim, according to court filings.

Another group of creditors led by Angelo Gordon, which loaned Revlon $880mn in May 2020, will receive that money back in full and roughly 60 cents on the dollar for earlier loans that they also provided. That group is leading a $675mn equity raise for the new Revlon that allows them to buy shares at a 30 per cent discount.

One fund participating in the equity raising said it was happy with the outcome because it had acquired the debt cheaply. “We are extremely happy. This is effectively a best-case scenario for us. These are world class brands.”

One of the junior creditors, who did not join in the 2020 financing deal, said Revlon should have been forced into bankruptcy back then. That investor also declined to participate in the discounted equity raising, saying: “Anyone excited to write this cheque is lying. It’s a massive investment for a company with a really uncertain future.”

The bankruptcy case wrapped up within 10 months, but Revlon estimated its lawyer and professional fees would reach $250mn, a figure a lawyer for the creditors committee described to the judge on Tuesday as “astounding”.

The Revlon case has been closely watched by private equity and distressed debt investors for clues as to whether bankruptcy judges would crack down on refinancing deals that pitted existing investors against one another. The Revlon judge declined to intervene, letting the 2020 financing stand.

Swiss group will have to sweeten its offer — or at least include a cash component

Some deals are just too good to pass up. Glencore’s bid for Teck is not one of them. The Switzerland-based miner and commodities trader wants to buy the Canadian miner for about $23bn in shares. Teck has rebuffed Glencore’s approach. It has plenty of reasons to hold out for a better offer.

For a start, it prefers its own restructuring plans to Glencore’s. The latter would demerge Teck’s coal assets and spin them out as a separate listed company codenamed CoalCo. It would combine the two company’s metals mining assets, named MetalsCo, for the moment.

On paper this makes some sense. Teck’s two giant copper mines in Chile have some overlap with Glencore’s.

But Teck has its own plan for a split. The Canadian miner hopes its version of MetalsCo would benefit just as much from a higher valuation if separated from coal. Coal is a big money spinner, to which Glencore is famously, if uncomfortably, wedded. But Teck knows shareholders are wary of investing in it.

Teck is controlled by the Keevil family through a dual-share structure, They hold A shares with 100 times the voting power of widely traded B shares, giving them a majority of the votes. That would explain a higher offer premium against a three-month average for the A shares at 43 per cent compared with 20 per cent for the B shares.

Glencore’s approach is opportunistic, offering 7.78 Glencore shares for each B share, the equivalent of where they traded at the start of March. It is also less than Teck’s average trading price over the past 12 months. For each A share, the London-listed miner is promising to exchange 12.73 of its shares.

Working backward from $4.25bn-$5.25bn in capitalised after-tax cost savings stated by Glencore, a deal could generate annual pre-tax savings of about $750mn-$800mn. On these numbers, it appears that the offer ratio would need to improve by at least a tenth for both share classes.

Glencore needs to sweeten its offer — or at least include a cash component if it hopes to win over the Keevil family. The current approach looks like a long shot.