Chan proves prescient

Warning bell rings as a Hangzhou property developer goes bankrupt

Chan proves prescient

Right call: Hang Lung’s Chan

“Lots of [property] companies are in far worse shape than people think,” Ronnie Chan, chairman of Hong Kong’s Hang Lung Properties said last October. “The situation is such that the smaller players will go out of business.”

It hasn’t taken long for Chan’s prediction to come true. Last week Hangzhou Glory Real Estate Development Company filed for bankruptcy protection, reports the Beijing News. Chan was right too that small companies seem to be at the forefront of financial trouble. Hangzhou Glory is said to have just Rmb40 million ($6.3 million) worth of debt outstanding, as well as Rmb24 million worth of unpaid tax arrears. Its holding company, Zhejiang Zhongjiang has also applied for bankruptcy protection, says China Securities Journal.

The South China Morning Post reckons that a trend is developing. This week two further private firms declared bankruptcy: Guangdeye Property Development in Shunde in Guangdong province, and Hangzhou Jinxiu Real Estate. The SCMP says it highlights “the growing pressure on cash-strapped small players that are struggling amid Beijing’s efforts to cool the housing market.”

Many developers overbid for land last year, planning to develop plots in the first quarter of this year. Now they are finding that banks are reluctant to provide further financing for construction. Sluggish sales also mean reduced cashflow.

Another Hangzhou-based developer Greentown sold a 51% stake in a residential and office project in the eastern city of Wuxi to another developer, Sunac China, in January. Greentown also sold its stake in its crown jewel – an office project in Shanghai‘s Bund area – to SOHO China (see WiC134). Yesterday, SOHO announced a Rmb2.14 billion deal for a further project part-owned by Greentown, for another commercial site in Shanghai.

“It’s a do-or-die situation facing those small developers,” Huang Feng, the chairman of Yinshu Capital, told the SCMP. “More debt-ridden firms will have to liquidate if the government chooses not to relax controls.”

Industry observers expect to see a wave of consolidation, with the better-off players taking advantage of the tumult. There are 30,000 property developers in China, and many of them now look exposed. Analysts estimate that the biggest 100 or so firms control only a quarter of the sector, with the next 500 firms commanding perhaps 15% more.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.