斑马消费

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Property Developers Hang On Until Dawn

Zebra Consumption, Yang Zhe

In late April, Lin Tengjiao decided to transfer control of the listed environmental protection company he owns. At the same time, Ji Haipeng liquidated his stakes in highway projects. Despite being of similar age, both men made the difficult decision to cut their losses, driven by one goal: to rescue the real estate developers under their respective names.

As recently as a year ago, Lin and Ji largely stayed out of the public eye. Lin’s Sunshine City was managed by the 'Shuangbin' duo, Zhu Rongbin and Wu Jianbin, while Ji Haipeng had long since transferred most of his shares in Longfor Group to his daughter, Ji Kaiting.

Last year, Sunac completely severed ties with the Taikang Group, prompting the departure of its key executive Zhu Rongbin and forcing Lin Tengjiao to divest himself of one of his responsibilities. Meanwhile, Longfor Group, which is urgently seeking to improve its debt structure, simply cannot afford to do without Old Ji’s personal involvement.

Over the past year and more, a wave of defaults among domestic property developers has left many company owners deeply anxious. Yang Keng of Landsea Green Development, Zhang Yuanlin of New World Holdings, Yang Jian of Zhongliang Holdings, Pan Weiming of Fosun Group, and others have all faced the bitter consequences of their rapid expansion into the hundred-billion-yuan league.

Amid a liquidity crisis, can Wang Wenxue retain control of Huaxia Happiness? Meanwhile, Rongsheng Development, also based in Hebei, reported its first-ever loss since going public, amounting to nearly 5 billion yuan. And how is Hu Baosen of Jianye Real Estate managing to regain his footing in the wake of floods and the pandemic?

Four or five years ago, the bosses of these property developers were all in the spotlight; back then, sunshine and sandy beaches were hardly luxuries—they were practically standard features of annual company galas. Today, however, dark clouds loom overhead and the city seems on the brink of collapse. Those once financially powerful tycoons are now risking their entire fortunes to raise cash and pay off debts.

In the past, the competition was about who could scale bigger; today, it’s about who can last longer.

Following the Shenzhen Stock Exchange's announcement allowing property developers to expand the use of proceeds from bond issuances, the industry has now reached the dawn before the light breaks.

Navigating Cycles

In 2021, as the chill winds began to blow, domestic property developers one after another encountered crises. The difficulties are no longer the exclusive burden of any single company. In this storm, no one can remain unscathed, nor can anyone predict which developer will be the next to collapse.

Four years ago, Vanke's rallying cry of 'survive' was widely dismissed by many as yet another 'cry wolf' scenario.

At the time, domestic property developers were obsessed with scale, recklessly leveraging and charging ahead in a frenzied rush that gradually spread throughout the entire industry.

Huang Xianzhi, Chairman of Evergrande Property Services, once deeply believed in the scale effect, arguing that only by achieving a certain scale could the company gain cost advantages and improve profitability.

As the company’s scale expanded, so did its risks; just before the collapse, Huang Xianzhi relented. During an investor conference call, he earnestly pleaded for more time to shore up cash flow.

Many property developers, like Huang Xianzhi, place great faith in the scale effect; the recently defaulted New World Holdings, Landsea Group, and Zhongliang Holdings are no exception.

During the years of Blue Light's rapid expansion, its newly acquired land reserves surged to record levels: 15 parcels in 2015 and 52 in 2020. Notably, in 2020, 37 parcels were acquired at premium rates exceeding 30%, 21 at premiums above 50%, and another 5 at premiums surpassing 100%.

Yang Keng is both ambitious and audacious, but his aggressive expansion at Blue Light Development has come at a steep price: the company's debt burden surged from 76.1 billion yuan in 2017 to 211.8 billion yuan in 2020, while its financing costs rose from 7.19% to 8.20%. Even after implementing a series of asset-light initiatives—including the sale of Dikang Pharmaceutical and Blue Light Jiabao Services—its debt problem remains unresolved. As of April 22, the total outstanding principal and interest on its debts had climbed to 32.822 billion yuan.

Sunac China has also been burdened by its relentless pace of expansion: in 2017, it was still moving at a measured and incremental pace, but after that, it simply could not slow down. That year, the company spent 65 billion yuan on land acquisitions, adding 20.2163 million square meters of gross floor area eligible for inclusion in planning calculations—yet its net profit attributable to shareholders for the same year was only 2.062 billion yuan.

Zhongliang Holdings has adopted a much more aggressive approach to land acquisition. In 2016, it secured an average of one parcel of land every five days; by 2018, this pace had accelerated to one parcel every 1.31 days, earning it a reputation as a relentless predator in the land market.

The reason why both large and small property developers are so enamored with the scale effect is rooted in an unspoken survival rule: only companies with assets under management exceeding 100 billion yuan have a future. Previously, Song Guangju of Poly Real Estate and Sun Hongbin of Sunac China both put forward this argument, which has since gradually evolved into an industry-wide consensus.

Creative Self-Rescue

Business empires built in haste are often not far from collapse. In the real estate industry, it is all too common to see buildings rise only to crumble just as quickly.

Whether it’s Boss Xu, who traveled north to seek help; Hu Baosen, who wrote a letter pleading for assistance; Zhang Yuanlin, who abruptly left the group chat; Ou Zonghong, one of Fujian's "European-style" brothers; or Chen Zhuolin, an avid Cantonese-opera fan—which property developer boss today isn’t facing a dire and desperate situation?

Over the past year, one property developer after another has defaulted, filling page after page of A4 paper—starting with Landsea Group and Baoneng, then spreading to Fantasia Holdings and Dalian Wanda Commercial Properties…

According to announcements posted on the People's Court Bulletin Website, nearly 400 property developers nationwide declared bankruptcy in 2021. Since the beginning of this year, high-profile defaults among property firms have continued to occur one after another.

The warning signs of these property developers' defaults are largely discernible: starting with the inability to redeem wealth-management products, followed by debt extensions, which in turn trigger corporate debt defaults and cash-flow crises.

Since the introduction of the "three red lines" policy, many property developers have found it increasingly difficult to roll over maturing debt with new borrowing, and both domestic and international financing channels have all but shut down. With few remaining favorable options at their disposal, these companies are left with no choice but to deploy every possible strategy—beyond making every effort on the sales front to accelerate cash collection—to stay afloat.

There are only a few avenues for relief: shareholder loans, rights issues, and the sale of property assets—these are among the limited options available to many property developers as they strive to turn around their crises.

Property assets have taken center stage. According to data from the China Index Academy, in 2021 the total value of M&A deals in the property management industry reached 35.32 billion yuan, a year-on-year increase of 234.15%.

Blue Light Development, Zhongliang Holdings, Yuzhou Group, Sunac China, and Country Garden Properties, among others, have all divested their property assets in exchange for cash.

In addition, consent from bondholders is obtained through bond extensions, exchange offers, or consent solicitations. Last year, property developers such as China Jinmao, Shimao, Jianye Real Estate, and Xincheng Holdings all repurchased their US dollar-denominated bonds, thereby boosting confidence in the capital markets.

Investor confidence in the real estate sector has plummeted to a level thinner than paper, raising concerns about the potential for systemic risks to erupt at the industry level.

As a key pillar of confidence for the broad base of small and medium-sized investors, property developers' leaders are striving to dispel this negative outlook.

Since last year, Sunac has been divesting assets to generate cash, raising more than 20 billion yuan in just over two months. In addition, Chairman Sun Hongbin has provided the company with a 450 million US dollar interest-free loan.

When the company was facing a liquidity crisis, Lin Tengjiao pledged his personal assets to provide full guarantees for the extension of US dollar bonds and decisively sold his shares in Industrial Bank; in March this year, he transferred equity in Weizheng Holdings to repay debts; recently, he has transferred equity in Longjing Environmental Protection held by Sunshine Group to Zijin Mining; in May, Sunac China further sold the Yongkang Zotye Town project, raising 5.7 billion yuan in cash.

In Sunac China Holdings' rights issue to raise 1.67 billion Hong Kong dollars, the major Lin family shareholders and several long-term institutional investors submitted oversubscribed applications, totaling 8.22 times the number of shares available for subscription—equivalent to 197% of the total shares on offer.

In September last year, Li Silian, Executive Director of Evergrande Property Services, and major shareholder Zhang Li jointly provided 8 billion Hong Kong dollars in financial support to the company; meanwhile, Zhang Lei, a shareholder of Contemporary Land, and Executive Director Zhang Peng jointly extended an 800 million Hong Kong dollar shareholder loan to the company.

Yao Zhenhua of Baoneng has indirectly raised 4.104 billion yuan by pledging shares of Zhongju High-Tech through Zhongshan Runtian.

Agile Group has transferred a 26.66% equity stake in Guangzhou Lihé for 1.844 billion yuan, marking its complete exit from the Guangzhou Asian Games City project—a mega-scale development second only to Hainan Qing Shui Bay.

Will good fortune follow adversity?

In 2017, Chan Cheuk-lam recorded a famous excerpt from Cantonese opera, 'Di Qing Breaks Through the Three Passes.' According to reports, his favorite line in the piece is: 'How could the mighty spirit of yesteryear possibly dissipate in a single day?'

The lyrics from that era seem even more relevant when applied to today's property developers.

In their early years, impulsive moves to pursue high leverage and rapid turnover were the main reasons these property developers fell into crisis. From asset-light restructuring to owners stepping in personally to inject capital, in a strict sense, they are now paying the price for their relentless pursuit of scale and lax management practices.

This has become a widespread industry issue; the consensus is that only by returning sales operations to normal and ensuring smooth cash flow can the industry move forward.

However, the persistent chill on the sales front leaves property developers feeling rather helpless as they strive to emerge from their predicament.

This year, Evergrande Property Services has announced a temporary halt to land acquisitions and the decision not to set any specific sales targets. In other words, the company’s primary focus is on revitalizing its projects and proactively addressing its liquidity crisis.

According to Fitch Ratings' research report, Evergrande Property Services has approximately 8.8 billion US dollars in capital-market bonds that are either due or subject to put options this year, including 1.6 billion yuan in bonds maturing in June, 293 million US dollars in bonds maturing in August, 246.5 million US dollars in bonds maturing in September, 1 billion yuan in onshore bonds with a put option in September, and 1.05 billion yuan in onshore bonds maturing in November, placing considerable pressure on its debt-servicing capacity.

Fitch believes that this Fujian-based property developer is now largely unable to raise capital through the capital markets and must rely solely on internal cash flows to meet its debt-servicing obligations.

Under extremely weak market conditions, Evergrande Property Services has seen its sales severely impacted. In the first three months of this year, contracted sales totaled 14.01 billion yuan, a year-on-year decrease of 64.97%.

Along with Evergrande, other developers experiencing a sharp sales decline include Agile Group, Zhongliang Holdings, and Sunac China. In the first three months of this year, these three property firms recorded year-on-year sales drops of 46.60%, 55%, and 94.42%, respectively.

In the process of helping property developers out of their predicament, Fantasia Holdings has been relatively fortunate. With strong fundamentals and a portfolio largely concentrated in core first- and second-tier cities as well as the Greater Bay Area, it has attracted investment from Guangdong-based powerhouse Yue Min Tou. For this developer that was on the brink of collapse, its fortunes have begun to turn.

However, Pan Jun, Chairman of the Board and Executive Director of Fantasia Holdings, stated that the company may require a very lengthy period—two to three years, or even longer—to resolve this crisis.

Geng Jianming, Chairman of Rongsheng Development, also expressed deep conviction, stating at this year's kickoff meeting: "If we can endure the harsh winter, spring will bring a riot of blossoms."

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