Does the name Country Garden (碧桂园) sound familiar to you?
If you have watched my youtube video “Mahathir, China Projects and Forest City”, you can probably recall that Country Garden is the developer behind Danga Bay and Forest City – the two controversial Johor Bahru projects in Malaysia.
For the last two weeks, this largest and most aggressive property developer in China is in the headlines all over China, Hong Kong and Australia, but for all the wrong reasons.
1. Unending leverage game
In January, Country Garden announced its intention to raise US$3 billion from the issue of 460 million new shares and convertible bonds. But when they announced their plan, share price of the Hong Kong-listed company immediately plunged in the stock market.
Since late last year, regulators in China have implemented tighter control over the issue of corporate bonds by property developers. Without easy financing, the financials of Chinese developers keep going downhill.
For fear of triggering collapse of the financial system, the Chinese government decided to relax the curb. On July 18, Country Garden finally managed to raise new funds by selling US$600 million of five-year bonds in Hong Kong.
Borrowing more debts in the market helped Country Garden and a few Chinese developers solve their cashflow problems temporarily. The sales revenue of Country Garden reaches 227 billion yuan (S$45 billion) last year. It is a 45.7 percent jump from the previous year. But total debts also increases to 971 billion yuan (S$194 billion), with a high debt ratio of 88.9 percent.
What it tells us
Property developers only look cash-rich on the surface but they may not be financially sound. Very often, they are compelled to expand their territories aggressively and grow their revenues exponentially by borrowing more loans, buying more lands and building more projects.
When the market situation changes, the units are not changing hands fast enough. They are quickly caught up in cashflow problems.
2. Notorious corruption scandal
According to an article in Financial Review, in mid-July, New South Wales Liberal MP Daryl Maguire and former Canterbury City Councillor Michael Hawatt were under investigation by Australia’s ICAC (Independent Commission Against Corruption) on an illegal arrangement with Country Garden in 2016.
Their discussion on kickbacks (from the sale of a $51 million land plot approved to build a 300-unit development on Canterbury Road in Sydney) was recorded on tape. Below is their conversation reported in The Urban Developer:
“If he’s going to give you 1.5 per cent that’s not enough.”
“1.5 per cent isn’t enough divided by two if you know what I’m talking about.” (He went on to say that 3 percent commission was better.)
“What I want … I just don’t want to f— around.”
“Have you got plans? Have you got the whole thing already done?”
“My client is mega big, OK.”
“If he’s interested my client is mega big and has got mega money and wants two or three DA approved projects right now. Today.”
Maguire has stepped down from the Liberal Party and he is now under pressure to resign from the Parliament.
Despite the release of the tape, the Chief Executive Country Garden Australia insisted that the company has done nothing wrong.
What it tells us
If you believe that bagging land deals is clean and straight-forward, you are too naïve.
In 2014, Hong Kong’s Head of Civil Service was charged with accepting bribes from the largest property developer Sun Hung Kai Properties. Among the kickbacks are HK$28.8 million (S$5 million) in cash, HK$5.4 million (S$0.94 million) in loans and rent-free of two luxury flats in Happy Valley.
The Kwok brothers were arrested in 2012 and Thomas Kwok was sentenced to five years in jail and fined HK$500,000 (S$86,800) in December 2014. He was released in June last year after a successful appeal.
According to the Corruption Perception Index 2017 by Transparency International, both Australia and Hong Kong are in the 13th position while Singapore currently ranks 6th among 180 countries.
3. Serious work accidents amid tight deadlines
Country Garden is well-known for its speedy turnaround in building new projects.
A good example is a residential development in Guilin that began its construction on March 23 this year. The whole project was completed and ready for sale on May 1. It only takers the developer 40 days to finish all the construction work.
What is behind their high productivity and lightning speed of building?
According to the special report by Hong Kong Apple Daily, in April the President of Country Garden distributed three memos to their staff in one week, with content as follows:
1) Projects in Tier 3, 4 and 5 cities must speed up construction to collect cash back as soon as possible.
2) Design plan have be out on the same day (to be produced overnight after award of the site).
3) If construction starts later than 40 days after land acquisition, or completes longer than 7 months, the project manager will be dismissed.
4) If construction starts immediately after land acquisition, the project manager will be rewarded with a cash bonus of 200,000 yuan (S$40,000). 10,000 yuan (S$2,000) will be deducted from the bonus for every day of delay. On the 20th day, there is no more incentive. From the 21st day onwards, every day of delay will be fined 10,000 yuan (S$2,000). If it goes beyond 40 days, the project manager will be sacked.
5) If the sales gallery can be opened within 35 days, the cash bonus is 200,000 yuan (S$40,000). There is no incentive after 35 days.
With everyone racing against time to complete new projects, worksite safety is compromised. In the last 12 months, there are already five fatal accidents with ten lives lost.
Last week, a serious accident in a County Garden construction site in Anhui killed six workers and seriously injured three others. This incident turned into a media crisis. The developer had to stop all projects in China for security checks. News of construction halt sent Country Garden’s shares tumbling with prices down 7.4 percent the next trading day.
Just a week later, construction resumed again at 90 percent of Country Garden projects in China. The developer told the media that the halt had no impact on the original completion target for all their projects.
The sad truth is: The market concerns more about the delay in project turnaround and timely lock-in of sales revenue than the continuous loss of human lives.
On the same week of the fatal accident in Anhui, Fortune magazine announced that Country Garden takes 353rd spot in the Fortune Global 500 list.
What it tells us
Developers bid sites at sky-high prices and are paying huge loans to the banks with high interest rates. They also have obligations to show shareholders good quarterly report cards with impressive sales numbers. The management team is constantly under great pressures that pass down to all levels in the organization.
When men are being driven up the wall, they are likely to exercise wrong judgements and make bad decisions. Country Garden is an example to show how developers can go to the extreme under the pressure to collect cash back fast.
Under the tight deadlines of selling all unit five years after planning approval and two years after obtaining TOP, what extreme measures will developers in Singapore take?
4. Quality problems of projects
Hong Kong people all know about Country Garden since the 1990s. The developer is well-known for building high-end bungalows as holiday homes in their hometowns in China. Back then, the concern was more on home security than project quality.
With construction speed as the top priority now, it won’t be surprising to see tradeoff in building quality in all the Country Garden’s residential projects in China.
Country Garden’s slogan is “5-star living for you” or “a 5-star home for you”. But the irony is: Home buyers are upset about the quality of the units that is far from the five-star quality promised by the developer.
According to the Financial Review article, as of today, over 100 developments completed in cities all over mainland China had received complaints from discontented owners.
On July 14, over 400 buyers protested outside Country Garden’s sales office in Nanjing.
Owners of Country Garden residential projects have started a nationwide “Country Garden Owners’ Rights Protection Movement”. Organized protests against poor quality control of the developer have spread to different provinces, including Fujian, Qingdao, Hangzhou, Wuhan, Wuxi, Gansu, Jiangxi, Shandong and Hebei.
What is the point to squeeze the last dollar of profit from customers but lose the only respect left from them?
What it tells us
In Singapore, there are increasing number of incidents of bad construction quality and poor workmanship. Reasons behind more building defects include shortage of experienced workers, low budget and tight timeline.
Developers in the Little Red Dot are facing higher costs, lower margins and stronger competitions in the industry. Under tremendous pressure to launch and complete new projects, how will it impact the building quality of future residential developments in Singapore?
2. On notorious corruption scandals – why not include indication of Malaysia and Singapore index since these indications would of more relevance to your readers in these 2 countries ?
4. Quality problems of projects – since the focus of your write up is presumably on Country Garden, why not provide indications of what the quality of their projects is like in Johor or Singapore as these would be of immediate interest to our investors here ?
The link to the Corruption Perception Index 2017 is inserted in the text. Anyone want to know more can click on it to check the countries they are interested in.
The topic on building quality or defect inspection have been covered a few times in my blog. I am not repeating it in this blog post. Loyal blog readers and past participants of our Defect Inspection seminar and workshops would know the answers.