After Evergrand, China’s Shimao arouses fears over the real estate sector Property

After the defaults of Evergrande and Kaisa, China’s Shimao Group is the latest real estate developer that has sparked fears of a deep 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 percent, and has remained at record lows throughout December. Earlier this month, the value of Shimao’s offshore bonds fell by 12 percent, the lowest since January 2012.

The value of land bonds also fell, and the Shanghai Stock Exchange was temporarily suspended from trading. In November, S&P Global Ratings downgraded Shimao’s long-term issuer credit rating from unsecured to BBB because tough business conditions could hinder the company’s deleveraging.

With weak sales and rising refinancing risks, Fitch and Moody’s have also downgraded Shimao.

Shimao’s sudden downturn – which has brought the group closer to being a “fallen angel”, reduced to a state of junk bonds – caught investors by surprise.

Some analysts fear Shimao’s difficulties may be more volatile for China’s real estate market Evergrande and Kaisa crisis, which was long overdue because the group met regulatory requirements and had a strong credit rating until recently.

Shimao did not scratch anything Beijing’s three red lines – Measures to reduce indebtedness were introduced among over-leveraged developers – which suggested that the financial situation should be good despite the growing debt.

The company’s financial health was questioned after a transaction between its management and development units sparked concerns that it wanted to protect the weaker parts of the business.

For many months, Shimao’s onshore bonds were also traded at higher price discounts than offshore bonds, which suggested an asymmetry in information about the group. This exacerbated the general feeling of unease over the company’s lack of visibility, a problem that is common to many Chinese property developers.

Investors were appalled that home buyers who bought 96 Shimao property in Shanghai recently could not register to transfer property titles because the property had already been ordered from one of Shimao’s lenders, the 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 this will be the key to the company’s maturity in January 2022.

If Shimao loses a payment, we believe this would have negative consequences for the industry, which is one of the top 10 developers in terms of contract sales in 2020 and was rated as an investment-grade developer a few months ago. ”

Shimao, which develops housing and commercial properties, is one of China’s largest real estate debt issuers, with a total of approximately $ 10.1 billion in outstanding land and sea bonds. Shanghai Shimao, the group’s ground unit, had $ 15.6 billion in liabilities at the end of September.

The group’s problems came after the Evergrande Group and Kaisa Group, two of China’s largest real estate developers, stopped paying 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, and its fortune is tied to the outlook for the global economy.

Chris Liem, Hong Kong’s owner and CEO of Engel & Völkers, told Al Jazeera that he believed Shimao was still sustainable, but that the company lacked transparency.

“The problem is the communication and transparency of their senior management, which unfortunately leaves more questions than answers,” Liem said.

Clarity concerns

Shimao has blamed market rumors for declining investor confidence. On Monday, the group said it was talking about selling some of its hotels and commercial properties to make payments on foreign bonds over the next three months.

The company announced earlier this month that it would sell a 22.5 percent stake in Hong Kong’s Grand Victoria development at a loss of about $ 770 million ($ 99 million).

UBS has announced that the group could dispose of other Hong Kong Congo assets, including a residential development in Tai Wo Ping and a 20 per cent stake in a Cheung Sha Wan housing project.

“We believe these two projects will enable the company to recycle $ 1.6 billion,” the investment bank said.

Liem said buyers would remain cautious until the group’s financial health concerns were removed.

“Shimao’s corporate communications need to play a more proactive role, as the lack of clarity is now the biggest concern,” he said. “The change in the company’s chief financial officer also creates uncertainty.”

“The business itself, if unsustainable, will be restructured to make the landing smooth,” Liem added.

Liem said that while individual developers like Shimao will face the “consequences,” he did not believe Beijing would allow the sector as a whole to develop a crisis.

“It is likely that Beijing will have a broad-based recovery plan that includes asset sales and finding buyers for priority projects,” Liem said.