After the failures of Evergrande and Kaisa, the Chinese group Shimao is the last real estate developer to raise fears of a large-scale crisis in the country’s indebted real estate market.
Since November, Shimao, China’s 13th largest real estate developer, has seen its share price fall by more than 50%, remaining at record levels throughout December. Earlier this month, the value of Shimao’s offshore bonds fell 12%, the lowest since January 2012.
The value of its onshore bonds also fell, leading the Shanghai Stock Exchange to temporarily halt trading. In November, S&P Global Ratings downgraded Shimao’s long-term credit rating from BB + to less secure BBB- amid fears that difficult business conditions could hamper the company’s deleveraging.
Citing weak sales and increased refinancing risks, rating agencies Fitch and Moody’s also downgraded Shimao’s rating.
Shimao’s sudden plunge – which brought the group closer to being a “fallen angel” reduced to junk bond status – caught investors off guard.
Some analysts fear that Shimao’s woes may be more destabilizing for the Chinese real estate market than the Evergrande and Kaisa crisis, which was long overdue, given that the group met regulatory requirements and until recently benefited from a strong credit rating.
Shimao had not violated any of Beijing’s three red lines – measures introduced to restrict borrowing among over-indebted developers – which suggested it should be in good financial health despite its growing debt load.
The company’s financial health has been called into question after a transaction between its business and development units raised concerns that it was seeking to support weaker parts of the business.
For many months, Shimao’s onshore bonds were also traded at more heavily discounted prices than their offshore bonds, suggesting an asymmetry of information about the group. This compounded a general unease over the company’s lack of visibility – a problem common to many Chinese real estate developers.
Investors were also frightened by reports that homebuyers who recently purchased 96 Shimao properties in Shanghai were unable to register for the title transfer because the properties had already been pledged to one. from Shimao’s lenders, Lujiazui International Trust.
“We believe this could affect Shimao’s image and future contract sales, especially in a weak real estate market,” UBS said in a research note. “Looking ahead, we believe the maturity of the company’s bonds in January 2022 will be a key area to watch.
In the event that Shimao misses a payment, we believe it would have a negative implication for the industry, as it is one of the top 10 developers in terms of contract sales in 2020, and it has been rated as a quality developer. just a few months ago. “
Shimao, which develops residential and commercial properties, is one of the largest issuers of real estate debt in China with an estimated $ 10.1 billion outstanding in onshore and offshore bonds. Shanghai Shimao, the group’s onshore unit, had liabilities totaling $ 15.6 billion at the end of September.
The group’s problems come after Evergrande Group and Kaisa Group, two of China’s largest real estate developers, defaulted on their offshore debts earlier this month, shaking confidence in the vast real estate market.
China’s real estate sector accounts for more than a quarter of the country’s gross domestic product, making its fortune a link with the outlook for the global economy.
Chris Liem, owner and director of Engel & Völkers Hong Kong, told Al Jazeera he believes Shimao is still sustainable but the company lacks transparency.
“The problem is the communication and transparency of their top management, which unfortunately leaves more questions than answers,” Liem said.
Shimao blamed the fall in investor confidence on market rumors. On Monday, the group said it was in talks to sell some of its hotels and commercial properties in order to make the offshore bond payments due over the next three months.
The company announced earlier this month that it would sell its 22.5% stake in the Greater Victoria development in Hong Kong at a loss of around HK $ 770 million ($ 99 million).
UBS has predicted that the group could divest other assets in Hong Kong, including a residential development in Tai Wo Ping and a 20% stake in a housing project in Cheung Sha Wan.
“We estimate that these two projects could allow the company to recycle $ 1.6 billion,” the investment bank said.
Liem said buyers will remain cautious until doubts about the group’s financial health are dispelled.
“Shimao’s corporate communications need to take a more proactive role, as lack of clarity is the main concern right now,” he said. “The change in the company’s CFO is also creating uncertainty.
“The companies themselves, if they are not sustainable, will be restructured to make the landing smooth,” Liem added.
Liem said that while individual developers like Shimao would face “consequences,” he did not believe Beijing would allow an industry crisis to develop under its watch.
“Beijing will most likely have a stimulus package for the wider sector that includes selling assets and finding buyers for defaulting projects,” Liem said.