In the bunker

Renhe’s founder: Hawken Xiu Li

In 2014 property developer Evergrande said it would invest Rmb100 billion ($16 billion) to create a new brand in agricultural products. So far there is little sign that its new business line has brought in significant revenue, but that hasn’t deterred another real estate firm from trying.

Last week, Renhe announced it was paying $840 million (in shares) to a company controlled by its chairman’s wife. The deal will see Renhe acquire eight agricultural wholesale markets in six Chinese cities. The Hong Kong-listed firm is so optimistic about the new venture that it claims that the business could bring in up to Rmb600 million in profits for the company in two years.

There is a reason Renhe is diversifying. “Renhe might be doing this [investing in agriculture] to try to improve their income sources, which has been relatively weak over the last few years,” says Christopher Yip, a debt analyst at Standard & Poor’s, the rating agency.

That appears to be an understatement. Burdened with debt, the Harbin-based developer narrowly avoided a default earlier this year after restructuring an international bond. However, it still has more than $500 million in loan and bond repayments due in the second half of next year. The commercial developer admitted to the Financial Times that it had “over-expanded” in the good times in 2009 and that its business model proved especially problematic when the downturn hit.

“We’re not in Beijing and Shanghai, we’re in the second- and third-tier cities where there is a serious oversupply problem [in terms of commercial retail space]”, says Rebecca Chan, Renhe’s vice-president of capital markets. “And when you have an oversupply, people will choose to be above not under the ground.” (Renhe began by turning disused underground bomb shelters into malls, see WiC230.)

Renhe was also recently embroiled in a new scandal. Shanghai Securities News, a Xinhua-run newspaper, reported that over 140 businesses have filed a lawsuit against Renhe, demanding the developer refund them for the retail space they have purchased at an underground commercial development that is connected to a new subway in Harbin. Many complained to the media that in the past five years, they haven’t seen anything other then what was shown to them in a floor plan.

“Back then the mall hadn’t even finished construction so if you wanted to buy a retail space you had to wait in line, and then according to the floor plan you could choose the space you liked – with different spaces having a different price. After you paid, we were given a handwritten receipt that includes the shop number and that’s the only proof we had that the real estate belonged to us,” one owner told the newspaper.

But why did it take five years for investors to demand to see the actual space? As it turns out, most owners had entered into leaseback agreements with Renhe, which offered to pay them a fixed yield rate of 8% for a period of five years. By the end of 2014, however, Renhe, citing large operating losses due to the weak performance of the mall, adjusted the yield rate down to as little as 1%.

Shanghai Securities News says that during its reporter’s visit to the mall it is largely empty, aside from a few fast food restaurants.

Some shop owners reckoned that they could do a better job of managing the space and wanted to take back the lease from Renhe. However, they soon realised that they had no idea where their property was. Why? There was no shop numbers anywhere in the mall. Some worried owners suspect that Renhe might have sold the same retail spaces to more than one buyer.

“We demand to know exactly where our shop is. At the moment we can’t even find its shadow. Isn’t this like spending money to buy a castle in the air?” one of the owners thundered.

It remains to be seen what is going to happen to the lawsuit. What’s certain is that Renhe now has more financial trouble than ever before. With only Rmb900 million in cash on hand, Renhe saw its financing cost surge from Rmb120 million in 2010 to Rmb540 million in 2014. In the last two years, the developer has accumulated an operating loss of Rmb3.4 billion.

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