Chinese developer Country Garden’s Malaysian project in focus amid contagion worries

The financial woes of a top Chinese property developer, including more than $6bn in first-half losses and a warning of default risk, are reverberating in Malaysia, home to the troubled company’s largest overseas project.

Country Garden, one of China’s biggest private real estate developers by sales, is at the centre of the country’s ongoing property sector crisis. The group last month reported a record net loss of Rmb48.9bn ($6.7bn) during the first six months of this year.

The turmoil has also hit peers such as China Evergrande Group, which has already defaulted on multiple debt obligations and recorded a net loss of more than Rmb33bn in the same period.

The crisis now threatens to spill over to Malaysia, where Country Garden’s $100bn Forest City project in the state of Johor, just across from Singapore, aims to house 700,000 people by 2035 in a mixed-use development. Plans include office space, malls, clinics, schools and other leisure facilities to be built across four reclaimed islands covering 30 sq km.

The undertaking is a joint venture between Country Garden, which holds a 60 per cent stake, and Esplanade Danga 88, a Malaysian corporation wholly owned by the Johor state government, with a 40 per cent shareholding.

On the ground at Forest City, which is partially opened, a number of shops and restaurants are closed down. Tables, desks, chairs, signs and documents are among the items lying around inside apparently deserted tenant spaces.

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A server at one of the few restaurants open on Wednesday afternoon, who asked not to be identified, told Nikkei Asia she had seen “very little” in terms of customer numbers in recent weeks.

In one of the emptied commercial blocks, a court document was posted on the glass door of a locked room. It ordered the tenant to vacate due to unpaid rent and included a demand to pay RM88,000 ($18,800) in overdue rent and legal expenses. Similar court order documents were seen at other vacated commercial spaces.

Rental prices for short-stay rooms were offered at a discount. An agent who helps owners lease their rooms on a daily basis was advertising “special prices” for six types of rooms by size, with cuts on “standard prices” ranging from 20 to more than 30 per cent. The smallest one-bedroom unit of 48 sq m was offered for RM218 a night, while the largest four-bedroom space of 165 sq m was at RM488, both discounted about 30 per cent.

Given the dire state of Country Garden’s finances, Malaysian analysts fear the company might not be able to ringfence its debt risks to prevent any potential initial default from growing into the kind of cross-default that would impact overseas projects including Forest City.

“Such [a] domino effect will be the worst scenario,” Samuel Tan, executive director of KGV International Property Consultants in Johor, told Nikkei.

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Tan said Forest City still required a lot of funding for land reclamation and other infrastructure work given it was still at a relatively early stage of development. Indeed, there were signs on the site that read “Land to be developed” in three languages — English, Malay and Chinese. A scale model of the entire site in the project’s sales gallery building also reveals big chunks of land yet to be developed.

Losses of the size announced last week and any bond default could “affect investors’ and financiers’ confidence level”, Tan said. “These would inevitably affect [Country Garden’s] ability to raise fund[s]. Buyer’s sentiment and demand will also be adversely affected.”

So far, Country Garden appears to be holding the line. It avoided default by making coupon payments on two US dollar bonds ahead of a 30-day grace period deadline on September 5. The Guangdong-based company paid investors a total of $22.5mn in interest on the two $500mn bonds, according to a person familiar with the matter.

Country Garden, which missed the coupon payments in early August, did not respond to a request for comment.

Khoo Zing Sheng, equity research analyst at AmBank Research, suggested there was room to deal with the pressures in a project that was just 15 per cent complete. Khoo said while Forest City’s gross development value stood at $100bn, that amount did not equate to the immediate expenses borne by Country Garden.

“This suggests that they will not accumulate the full $100bn debt immediately,” he said. “Instead, it may primarily cover expenses related to land and infrastructure development. The construction costs and other expenditures will accrue as new projects are initiated.”

Khoo also said should Country Garden encounter difficulties in delivering new projects in Forest City due to capital issues, the company might explore several options, including selling part of its stake in the development, seeking additional partners or disposing of land and investment properties.

Tan of KGV International said Forest City could revamp its shareholding structure or adopt a new business model by parcelling the site into smaller zones and selling them to developers specialising in specific sectors such as office buildings, retail, hospitality, entertainment, business parks and high-tech parks.

Last month, Forest City said in a statement that it had sufficient net assets and land reserves and will push forward with its work.

“Our company’s projects in Malaysia are operating normally and the sales performance is strong,” Syarul Izam Sarifudin, Forest City vice-president, said in the statement.

But Forest City declined to comment on whether it was able to isolate itself from Country Garden’s debts and whether it had any plans to restructure.

“As the company had mentioned repetitively, we are not authorised to comment on the financial issue that concerns the group,” Forest City said in response to questions from Nikkei.

A sign by Forest City says: ‘Land to be developed’
The $100bn Forest City project still has far to go before completion © Kenji Kawase

Prime Minister Anwar Ibrahim last month announced the creation of a special financial zone to lend support. Anwar couched the measure for Forest City as part of efforts to boost investment, growth and economic activity in Johor. Among incentives offered are a special income tax rate of 15 per cent for skilled workers and multiple-entry visas.

Two local men in their 20s who wanted to remain anonymous indicated their wariness over the project as they strolled along a desolate-looking mall dotted with empty shops on Wednesday. They said apartments at the site were “completely unaffordable for most of us locals”, adding that they were worried about the possibility of the local government stepping in as its Chinese partner’s financial situation faltered, potentially using money raised from local taxpayers.

Demand for the project fell sharply following China’s move to stem capital outflows in 2017 and the ensuing Covid-19 pandemic. But Forest City says it has completed about 26,000 residential units, with more than 80 per cent sold to buyers from more than 30 countries, while two hotels and two international-standard golf courses are now fully open.

There were some positive signs visible on the ground in Forest City. A shopkeeper at a convenience store said business was picking up, and new stores planned to begin operating in the coming months as pandemic restrictions were lifted and travel from mainland China and elsewhere recovered. Some shops and restaurants have posted job notices.

Analysts said the government’s initiative was likely to provide a tailwind.

“The recent announcement to accord the special financial zone status with a slew of incentives will still be a positive catalyst for Forest City,” Tan said.

Ambank Research’s Khoo said the timing was “opportune for Malaysia” in the face of rising costs in Singapore, as it could make the project an attractive alternative to draw global investors and skilled professionals.

Additional reporting by CK Tan in Shanghai

A version of this article was first published by Nikkei Asia on September 6. ©2023 Nikkei Inc. All rights reserved.

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