After defaults by Evergrande and Kaisa, China’s Shimao Group is the latest property developer to raise fears of a far-reaching crisis in the country’s indebted real estate market.
Since November, Shimao, China’s 13th largest real estate developer, has seen its share price plunge more than 50 percent, remaining at record lows throughout December. Earlier this month, the value of Shimao’s offshore bonds dropped by 12 percent, the lowest since January 2012.
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The value of its onshore bonds also fell, leading the Shanghai bourse to temporarily suspend trading. In November, S&P Global Ratings downgraded Shimao’s long-term issuer credit rating from BB+ to a less secure BBB- due to concerns that tough business conditions could impede the company’s deleveraging.
Citing weak sales and increased refinancing risks, rating agencies Fitch and Moody’s have also downgraded Shimao.
Shimao’s sudden plunge – which has taken the group close to being a “fallen angel” reduced to junk bond status – caught investors off-guard.
Some analysts fear Shimao’s difficulties could be more destabilising for the Chinese property market than the Evergrande and Kaisa crisis, which was long foreseen, given that the group met regulatory requirements and until recently enjoyed a strong credit rating.
Shimao had not breached any of Beijing’s three red lines – metrics introduced to restrict borrowing among overleveraged developers – which suggested it should be in good financial standing despite its increasing debt.
The company’s financial health came into question after a transaction between its management and development units raised concerns it was seeking to prop up weaker parts of the business.
For many months, Shimao’s onshore bonds were also traded at more heavily discounted prices than their offshore bonds, which suggested an asymmetry of information about the group. That compounded a general sense of unease over the company’s lack of visibility – a problem common to many Chinese property developers.
Investors were also spooked by reports that homebuyers who recently purchased 96 Shimao properties in Shanghai were not able to register for the transfer of ownership titles as the properties had already been pledged to one of Shimao’s lenders, Lujiazui International Trust.
“We think this could affect Shimao’s image and future contract sales, particularly in a weak property market,” UBS said in a research note. “Looking ahead, we believe the company’s bond maturity in January 2022 will be key to watch.
In the event that Shimao misses a payment, we believe this would have a negative implication for the sector, as it is a top-10 developer by contract sales in 2020, and it was rated an investment-grade developer just a few months ago.”
Shimao, which develops residential and commercial properties, is one of China’s largest property debt issuers with an estimated $10.1bn in outstanding onshore and offshore bonds. Shanghai Shimao, the group’s onshore unit, had liabilities totalling $15.6bn as of the end of September.
The group’s troubles come after Evergrande Group and Kaisa Group, two of China’s biggest property developers, earlier this month defaulted on their offshore debts, shaking confidence in the vast property market.
China’s real estate sector accounts for more than a quarter of the country’s gross domestic product, making its fortunes entwined with the prospects of the global economy.
Chris Liem, the owner and principal of Engel & Völkers Hong Kong, told Al Jazeera he believed Shimao was still sustainable but the company lacked transparency.
“The issue is the communication and transparency of their top management, which unfortunately leaves more questions than answers,” Liem said.
Shimao has blamed plummeting investor confidence on market rumours. On Monday, the group said it was in talks to sell some of its hotels and commercial properties in order to make offshore bond payments due in the next three months.
The company earlier this month announced that it would sell its 22.5 percent stake in the Grand Victoria development in Hong Kong at a loss of about $770 million Hong Kong dollars ($99m).
UBS has predicted the group may dispose of other Hong Kong Kong assets, including a residential development in Tai Wo Ping and a 20 percent stake in a Cheung Sha Wan housing project.
“We estimate these two projects may allow the company to recycle $1.6bn,” the investment bank said.
Liem said buyers would remain wary until doubts about the group’s financial health were put to rest.
“Shimao’s corporate communications need to have a more proactive role as the lack of clarity is the biggest concern now,” he said. “The change of the company’s CFO also creates uncertainty.”
“The businesses themselves, if they’re not sustainable, will be restructured so that the landing will be a soft one,” Liem added.
Liem said that although individual developers such as Shimao would face “consequences,” he did not believe Beijing would allow a sector-wide crisis to develop on its watch.
“Beijing will most likely have a recovery plan for the broader sector that includes asset sales and finding buyers for defaulted projects,” Liem said.