(Yicai Global) July 14 -- A growing number of early buyers of residential projects under development in China are refusing to pay back their mortgages as a tight financing environment and sluggish sales have meant that many developers are struggling to complete construction on time.

Buyers in around 150 housing projects across 20 provincial-level regions have banded together to demand that developers restart building and that the houses are delivered within a reasonable period of time, otherwise they will all stop repaying their bank loans, Yicai Global has learned. Should this happen it would be another major blow to real estate companies already teetering on the brink.

Many of these projects are by debt defaulters such as China Evergrande Group, Yango Group, Tahoe Investment Group, Sunac China and Kaisa. Most are in smaller third and fourth-tier cities, but some in the big first and second-tier cities have also been halted.

Around 500 million square meters of property under development have now paused construction, according to GF Securities. Based on an average price of CNY10,000 (USD1,488) per square meter, this amounts to CNY5 trillion (USD742 billion) worth of properties. And, calculated on an average downpayment of 60 percent, this involves mortgages of around CNY2 trillion.

Financing difficulties and slow sales are the main reasons for the halt in construction, an employee from a real estate firm in north China said.

Lax Oversight

Pre-sales are an important way of financing real estate projects, another industry insider said. But quite often, revenue from the presales is misappropriated by the developer. When there are no new inflows, funds are quickly exhausted, leading to the halt of the project. So even if some projects resume construction under pressure, progress is slow.

Due to the loose supervision of pre-sales funds by local governments and banks, the developer might use the money for the construction of other projects, to repay loans or even to buy more land use rights, a real estate insider said. With stricter oversight, this would not happen.

Some home buyers in Zhengzhou, central Henan province, for instance, did not receive their new homes on the agreed date. They then discovered that the developer had squandered CNY2.6 billion (USD390 million) from the project account. On June 30 they said they will no longer pay their mortgages.

Big Blow

“It is not legally advisable for home buyers to stop repaying their loans,” said Zhang Bo, a partner at Beijing Yunjia Law Firm. “They are likely to be sued by banks for breach of contract, which will also affect their credit records.”

And it will have a severe impact on the real estate industry. “The market has just picked up a little, but refusal to repay loans on unfinished properties will be a big blow to market confidence, which is already fragile,” a market insider said.

“Many developers are faced with the difficult choice of whether to use their remaining funds to repay debt or to spend it on the construction of existing projects to ensure on-time delivery,” another real estate firm in the east of the country said.

“Our firm is focusing on increasing its revenue sources and cutting costs,” a staff member at a developer in Henan province said. “Specific measures include enlarging financing, selling project equity, revitalizing assets and accelerating destocking. Only by keeping the company running can we gradually deliver the projects," he added.

Editors: Tang Shihua, Kim Taylor