HUNG CHIN LIU
The debt-hobbled former property leader is quietly exiting its many overseas projects to raise cash, as it also faces policy uncertainties abroad
A decade ago when it was on the rise, Country Garden Holdings Co. Ltd. (OTCPK:CTRYF)(OTCPK:CTRYY)(OTCPK:CTRGF), having conquered its home China market by feeding an endless appetite for homes from property-hungry Chinese, set its sights overseas. The Asia Pacific market topped the list of destinations for then-Chairman Yang Guoqiang, who acted swiftly by investing in Malaysia, Thailand, Indonesia and Australia. By 2017, the company was working on 17 projects in the region.
Fast forward to the present, when rather than bringing Country Garden new wealth, much of that overseas portfolio has run into a brick-wall, adding to the company’s ongoing financial woes.
Country Garden recently said it planned to sell its remaining interest in its Wilton Greens project in Sydney for A$240 million ($158 million), in a deal that may close by June this year. That came after a sale last October where it offloaded other plots it owned that were part of the Windermere residential project in Melbourne to Singapore’s Frasers Property for A$250 million. A successful sale of the Sydney project would mark a complete exit from Australia for the company.
Country Garden is also using its land and properties in Thailand as collateral to backstop two bonds it issued worth a combined 774 billion baht ($21.7 billion), relieving it from responsibility to personally guarantee the bonds.
Forest City ghost town
But Country Garden’s troubles in Australia and Thailand pale compared with the woes facing its super-sized Forest City development in Malaysia, which has become a hot potato providing endless headaches for the company. The development in Malaysia’s Iskandar special economic zone adjacent to Singapore was meant to show off its global ambitions, built over a sprawling 30 square kilometers. The development was designed with residential, commercial, hotel and tourism components, built over 25 to 30 years with an investment of $100 billion.
In 2016, the Malaysia’s then-Prime Minister Najib Razak vowed to create 200,000 jobs in the special economic zone over 20 years. But then he was abruptly replaced by Mahathir Mohamad, who first threatened to ban any foreign purchase of the Forest City properties, before easing slightly while still stressing that visa restrictions would make it hard for foreigners to actually live there. That sparked an uproar among its many foreign investors, who have since shunned the project.
The final nail in the coffin came during the pandemic, which brought sales and construction to a near halt. Sales plunged and funds quickly dried up. Meantime, Country Garden’s troubles at home meant it couldn’t spare any domestic resources to support its Malaysia business. At the same time, buyers who took delivery and went to live in their Forest City homes found themselves in a cold, empty city with little traffic, far from the hustle and bustle they were promised. That led to a slew of protests, further dampening buyer and investor interest, as observers began to label Forest City as a ghost town.
Current Malaysian Prime Minister Anwar Ibrahim designated the city as a special financial zone last year, reviving hopes for the project. But investors are still cautious, concerned about the frequent policy flip-flops.
The overseas turmoil comes as Country Garden’s current 130 billion yuan ($18 billion) in cash and restricted cash at the end of last June was roughly half of its 257.9 billion yuan in interest-bearing debt. Things have worsened since then, with steady offshore debt defaults and sharp sales declines in the second half of last year, leaving the company overwhelmed with zero resources to commit to continuing the Forest City project.
The mess is the result of Country Garden’s reckless expansion, combined with misjudgment of local business climates, especially the turmoil in Malaysian politics. The pandemic didn’t help either, and the final straw for the company was the Chinese government’s forced deleveraging for all developers with its “Three Red Lines” policy in 2020.
Wild West
Detractors believe that developers like Country Garden have only themselves to blame, and their current woes are the direct result of blind over-leveraged expansion with little or no consideration for risk management over the years.
But such Monday-morning quarterbacking doesn’t help much as many of these companies teeter on the brink of insolvency. Such heavily indebted developers now represent the majority of privately owned Chinese property companies. Players differ only in terms of how deeply in debt they are, whether they’re on the hook for tens or hundreds of billions, or even trillions, of yuan.
The fact that nearly all private developers now face the same dilemma shows that all were simply following the same rules that gave them easy access to credit to fuel their building frenzy as China encouraged them to develop the national housing market. Back then, any developer that didn’t take on such massive debt risked either falling behind or being forced from the game outright.
It’s only now just 20 years since China liberalized its housing market. That major shift after decades of state-led development left many rules waiting to be written, and practices normally seen in more mature markets lacking at the embryonic stage, as policymakers felt their way forward. The result was a virtual Wild West in a freewheeling landscape where almost anything could go.
Imagine hundreds of cars on a brand-new road with no speed limit. They race at 100 kph at first, then 200 and 300 kph, with no major accidents initially, all afraid to slow down for fear of falling behind. Speeds are up to 500 kph before the traffic police finally smell danger and order all contestants to slam on the brakes, creating havoc on the road.
At the end of the day, Chinese developers like Country Garden have been going at full speed for years without regard for safety. After years of reckless unsustainable overdevelopment, their moment of reckoning has finally arrived. Their needed mid-courses correction will undoubtedly be painful, with some certain to crash and burn. But the overall result should be a consolidation around the stronger players, which will ultimately set the industry on a stronger footing going forward.
