On the outskirts of Lanzhou, a city in western China, a large banner plastered over an unfinished residential complex celebrated not the Lunar New Year or China’s National Day, but something altogether different: the “top off” of the building. “封顶大吉,” the massive red banners read – “celebrate the top off.” (In construction parlance, “topping off” means completing the basic structure of a building.)
It was an occasion momentous enough to be honored with fireworks in the sprawling capital of China’s Gansu province.
The banners themselves are relics of a centuries-old Chinese tradition of celebrating the construction feats of human labor. Yet today, the promotional celebrations announcing the top off mark important milestones for struggling Chinese property giants and foreign trading partners waiting for any indications of a turnaround in China’s prolonged property crisis.
There are 20 million unfinished pre-sale buildings in China, according to Noruma Securities Chief China economist Lu Ting. When the sign goes up to “celebrate the top off,” that means one less distressed building.
Unfinished buildings are one of the most important observable barometers of the country’s four-year-long property crisis and the malaise it has engendered in the wider economy and consumer sentiment. Over 70 percent of Chinese household wealth is tied up in property.
Chinese developers wildly overbuilt during the property market’s boom days, encouraged by local governments that relied on land sales as a source of revenue and to hit growth targets.
That growth model began to fade after the central government started criticizing overinvestment in residential property, saying that “houses are for living, not for speculation,” a line which appeared in the Central Economic Work Conference of December 2016.
Then in 2020, Xi Jinping got tougher, announcing the “three red lines” policy which sharply cut into how much developers could borrow. Soon after, overleveraged firms like Evergrande, the country’s largest private builder, struggled to roll over debts and began to collapse.
The red banners on unfinished buildings, easily spottable nationwide, are rare signs of vitality for some projects in an otherwise stagnant property market, widely watched across China. The “celebrate the top off” signs drape those developments that have passed the riskiest building phase, marking the buildings in localities that are finally turning the corner.
In 2024, I drove through ghost towns of unfinished buildings in 19 cities in 14 provinces. Despite large numbers of half-built buildings, the landscape was dotted with red “top off” banners.
Over the span of that year, which I spent touring development projects and speaking to developers and local officials, the amount of floor space of buildings under construction shrank by 12.7 percent nationally, investment in real estate development declined by 10.6 percent, and the government began to renovate 79,000 dilapidated urban housing units.
Those numbers reflect the ongoing focus of Beijing: how to wean the Chinese economy off of dependence on the commercial property market and rebuild poor neighborhoods.
That said, the overhang of unfinished buildings remains. The area of floor space of buildings completed last year slid by nearly 30 percent compared to 2023. Put differently, the top off of a building is an achievement especially worth celebrating in this market.
The top off phase marks roughly the halfway point of a building’s construction and investment, according to a retired director of a Housing and Urban-Rural Development Bureau in the Guangxi autonomous region, who preferred to remain anonymous. “The top off reduces the risk of becoming a half-finished project due to financial collapse, but it does not mean that financial collapse only occurs before the top off,” he said, speaking in Chinese. Banks use whether the top off is completed as a parameter to review mortgage loans, he added.
Touring one multibuilding development project underlines the complex game of chess that developers must navigate to reach the “top off” stage. It’s a delicate decision-making process that takes into account market conditions, homebuyer feedback, cash flow constraints, the pace of local industry development, and considerations like the timing of the completion of a nearby road.
Aside from market considerations, how developers comply with rules and financial regulations also impacts whether buildings go unfinished.
Reaching the top off stage is a parameter local authorities use when issuing permits that allow developers to sell their property in advance. Yet not all developers abide by the process, said Ye Sheng, a Shanghai office principal at Goettsch Partners, an architecture firm. “Some developers start selling properties illegally at the initial stage of housing construction investment, using advances to roll over investments in new properties to maximize short-term returns” he said.
Poor market conditions coupled with illegal pre-sales have significant implications for homebuyers. “Due to the uncertainty of the market, when the investment deviation causes cash flow fluctuations, it often leads to delays on completion of the construction, and thus causes a series of legal rights protection and even social cases” added Sheng.
In some regions of China, commercial banks can only issue housing loans to homebuyers buying properties that have reached the top off phase. Even then, homebuyers often start paying mortgages years before the property is complete.
“The transformation of the property bubble into a Ponzi-type structure – in which new property purchases were necessary to provide the revenues to construct houses already sold – occurred during China’s deleveraging campaign in 2017 and 2018,” said Logan Wright, partner and director of China markets research at Rhodium Group. Indebted developers turned to pre-construction sales as a solution to repay shadow debt, a process he said essentially amounted to borrowing from homeowners.
By law, commercial banks must deposit developers’ advance capital from homebuyers in special regulatory accounts, subject to banking supervision. Such regulations can be traced back to 2003 and 2007, and have been reaffirmed and but not enforced uniformly across China. After the top off stage, banks can legally relax those requirements in some cases.
Yet in practice, commercial banks have historically granted developer requests to deposit their pre-sale funds in a general account. This practice has led some developers to misappropriate funds and suspend construction projects.
The central government has implemented policies to eliminate excess housing inventory and encourage developers to resume stalled developments. An October 2024 rescue package doubled credit for renovating unfinished buildings to stimulate the housing market and revive the economy. Local governments can now use special purpose bond proceeds to buy out housing stock. Many cities have loosened restrictions for second homebuyers to reverse the country’s demand slump.
Homebuyers hold the legal right to terminate a loan contract if a developer fails to deliver on a housing guarantee, but the process is practically complicated and seldom achieved. Thus, average individuals often bear the costs of stalled projects and indebted developers.
There are currently 41 developers in active restructuring or liquidation proceedings in Hong Kong.