When Chinese developers go bust, how will it affect us?
After Evergrande, this Tuesday (September 19) another leading China property developer Sunac filed for Chapter 15 bankruptcy protection in the US.
The country’s second largest developer Evergrande is estimated to be US$340 billion in debt. The company lost US$81 billion last year. Similarly, China’s biggest developer Country Garden also has total liabilities of US$190 billion and reported US$6.7 billion loss. On August 29, Forbes published an article with a headline that reads “China real estate giant Country Garden could be next to go bust”.
Article on Chinese developers simply missed the point
Last Friday (September 15), The Straits Times published an article titled “Singapore developers, banks could emerge unscathed from China’s property crisis“. Obviously, this is a feel-good article to calm the readers and assure us that everything is just fine.
It said, although China’s property sector is in trouble, “Singapore property developers and banks with operations in that country may escape without serious harm, said market watchers.” This is because Singapore developers do not have liquidity problems and “have operations in cities relatively unaffected by the crisis”. Similarly, Singapore banks have very limited exposure to China’s property sector.
The article has completely missed the point.
In the first place, there is hardly any Singapore-listed developer has significant presence in China’s residential property market. Don’t forget, with no local connection, you are only one of those foreign property firms eager to set foot in China. Even property tycoon Li Ka-shing spent years in vain to expand his real estate empire there.
Likewise, in the last decade, when global banks and asset management companies couldn’t wait to play the red-hot China property game, outsiders like Singapore’s three local banks were not invited.
Instead, a meaning article about Singapore’s possible exposure to China’s property crisis should focus on Singapore investors who put their money in funds and bonds exposed to Chinese developers. The wealth managers have sold these financial products to high-net-worth clients. (Read “Six funds for sale in Singapore stuck with Country Garden’s near-default issues: Morningstar”)
To give an example, below is a list of global banks and asset managers holding bonds of Country Garden. No wonder the US and European media frequently report outstanding loans, repayment deadlines and missing payments of Chinese developers.
– Blackrock (US$358.5 million)
– HSBC (US$343.6 million)
– Allianz (US$301 million)
– Fidelity International (US$187.1 million)
– UBS (US$133.7 million)
– JPMorgan (US$118 million)
– Ninety One UK (US$104.3 million)
– Apollo Asset Management (US$79.2 million)
– Deutche Bank (US$73.1 million)
– Bank Lombard Odier & Co (US$72.4 million)
Forest City – the US$100 billion white elephant
Chinese developers are being criticized for building ghost towns in Johor Bahru. A typical example is R&F Princess Cove. There is only a handful of occupied blocks, with many empty blocks and a ghost mall.
Likewise, Country Garden has three residential projects – Forest City, Danga Bay and Central Park. Forest City has 28,000 residential units being built but only 9,000 are occupied. The developer claimed that it is 15 percent completed. It originally targeted to have 700,000 residents by 2050. That is over 12 percent of Singapore’s population!
As expected, the first type of development completed in the new economic zone was large residential projects built by developers. The overpriced off-plan homes were sold to eager buyers tapping into the future potential … Where are the major industries, high pay employment opportunities and new population there? How can buyers snap up so many residential units in a place still under development?
– Vina Ip, Behind The Scenes of The Property Market
A recent write-up from Agence France-Presse gives a glimpse of what is happening in Forest City.
“Below sit rows of shuttered shopfronts, some with court documents stuck to doors demanding outstanding payments. Inside, rubbish is strewn across the floors.
‘Everyone comes here for the liquor,’ said Singapore-based technician Denish Raj Ravindaran, 32. ‘I will not stay here, it is a ghost town. The road is dark and dangerous and there are no street lights.’
An artificial sand beach littered with beer cans, where families picnic under coconut trees, bears a sign warning would-be swimmers about crocodiles.
At one 45-storey tower, an official says only two floors are occupied while the rest are for sale.”
– “Malaysia’s Forest City teeters over China property giant woes”, Agence France-Presse, 3 September 2023
3 big problems facing Singapore owners
Problems arise when Singapore homebuyers assume that buying properties from Chinese developers in Johor Bahru is no different from buying homes from Singapore-based developers in the little red dot. Below are three main ones.
1) Property value
I read with interest the recent Channel NewAsia article “‘Deserted ghost town’: Johor Country Garden condo residents concerned over unfinished projects amid China developer’s debt crisis”.
One owner bought a unit there “partly for investment” for RM700,000. It is worth RM400,000 now. Another owner bought a three-bedroom apartment there for RM1 million and rented it out for RM2,000 a month. Market rent has dropped to RM900. The gross rental yield is 1 percent, not to mention the depreciation of Malaysian ringgit.
Amid uncertainties of Country Garden’s survival, owners worry that prices and rents of the developer’s projects will fall further.
The owners’ concerns are understandable. You are not staying there. And you cannot sell or lease the property. It is no different from buying a virtual home in the metaverse except you still need to pay maintenance fees and property taxes.
It is Singapore conventional wisdom that property prices will always go up in the long term. But this is not true in some countries where property prices peaked a long time ago and one may have to wait forever to see whether there is a comeback.
“The Astaka was launched from RM1,300 and up to RM1,488 psf. A recent mortgagee sale unit is asking for merely RM545 psf. What a deep dive of 60 percent in value! Similarly, prices of R&F Princess Cove have fallen from RM1,300 psf to RM650 psf. Country Garden @ Danga Bay is also selling half price from RM1,200 psf to RM600 psf. Landed homes like Horizon Hills have prices dropped 40 percent since its launch.”
– “What happened to buyers who overpaid at new launch?”, PropertySoul.com
2) Title of ownership
Over at Danga Bay, the article said residents bought in 2015 and moved into the units in 2018. However, they have yet to receive the strata title. Fancy thinking that there is an SLA equivalent there automatically records your transaction in the caveat database upon sales completion. They were told that this is due to “slow administrative process by the developer as well as local government agencies.”
Slow administrative process? What an excuse!
Slow? Shanghai has the world’s fastest high-speed rail at 430 km/h. China is arguably the most efficient country, especially when it comes to implementing the directives from the central government.
Why are they holding back the issue of the strata title? Because this is the only official document to prove the ownership of a property. Once the owners have it, they can sell their property in the open market at a price lower than the unsold units marketing by the developer.
My friend in Hong Kong bought a vacation home in China. She only received the strata title years after collecting the key to her apartment. It happened after the developer finally sold the last unit in the project.
Guess how long it takes for Chinese developers to clear all the unsold units in their projects in Johor Bahru?
3) Building quality
Simply google the reviews of all the Johor Bahru housing projects popular with Singapore buyers in the mid to late 2010s. The most honest reviews are those from tenants, Airbnb guests and owners actually staying there. The experiences they encountered are eye-opening. Look for problems in defects, workmanship, utilities, facilities and management office.
“As the Japanese saying goes, others’ misfortunes are as sweet as honey. While reading the sad stories of strangers, we are secretly happy that we are not one of the victims. We believe that we are smarter and more cautious with our money.”
– Vina Ip, Behind The Scenes of The Property Market
“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.”
– “4 things Country Garden’s hiccups tell us about developers”, PropertySoul.com
Unfinished overseas projects of Chinese developers
With Country Garden kept missing bond repayments, owners are worried that the developer’s unfinished projects in Johor Bahru will be abandoned. Housing projects being abandoned are called sick projects in Malaysia. There are currently 734 sick housing projects in the country.
No worries. If an uncompleted project still has value, the Chinese developer will sell it instead of abandon it.
Fantasia, a Chinese developer active in the Singapore property market in the mid-2010s, has been missing bond payments since October 2021. Shortly after, creditors filed winding-up petition against the developer. In April 2022, Fantasia said its cashflow problem is affecting the construction progress of Singapore project Parkwood Collection at Lorong 1 Realty Park and sold all its shares in the project.
Not long ago, Chinese developers flocked to Australia in the 2010s. However, in the midst of the China property crisis, one by one they are leaving from the Australian housing market.
This July Country Garden put up Wilton Greens project in Sydney and Windermere estate in Melbourne for sale. For Windermere estate, the developer acquired the site for a record A$400 million in 2017. Now it is selling at a big discount at A$250 million.
The future of Forest City is anyone’s guess.
You can watch the recording of the presentations at the 2023 Mid-Year Singapore Property Review and Outlook seminar. Watch the presentations of Ku Swee Yong and Vina Ip here.
I will share with you the good deals in the current market and how to do your research in the new online course Buy The Right Condos. You can also check out other online courses.
The video 2023 Singapore Private Home Market is available for viewing here.
If you need advice on property matters or residential properties in Singapore, you can check out my one-to-one consultation service.
My book Behind The Scenes of The Property Market is available for preview and order online.
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