China’s property sector policy has exposed the grim financial condition of real estate developers including those operating in Cambodia, which raises questions over the viability of their projects and business going forward
The dark blue netting draping over one of Yuetai Group Co Ltd’s Phnom Penh Habour project breaks the tone along the riverfront’s largely French colonial architecture. Inside, work is going on as normal, albeit slower than expected.
The construction, made up of condominiums and shophouses, represents some bits of phases two and four which are being built to meet the demand of buyers.
What is not seen are the higher-end components of the $800 million project that would feature twin office towers, shopping malls, an arts and cultural centre, high-rise condominium blocks, a Ferris wheel and a replica of Guangzhou’s iconic five-star White Swan hotel.
When complete, the project covering nine hectares of Riverside land would display a plush skyline along the banks of Tonle Sap, flanked by the Royal Palace and neighbouring Koh Pich.
For now, the subsidiary of Shanghai-listed Guangzhou Yuetai Group Co Ltd, is focusing on delivering the lower-end portions of the project, priced between $40,000 and $100,000 for condos and $200,000 and $400,000 for shophouses.
“We have sold about 70 per cent of the shophouse and condo units, but mostly to Cambodians,” said sales representative Lim Seing.
However, he quickly dismisses any knowledge of the commencement for the rest of the construction and the alleged sale of land that was leased from the Phnom Penh Autonomous Port to develop the project. “I don’t know about that,” Seing said.
Neither was he willing to respond to questions relating to the filing of bankruptcy by Yuetai Group’s parent company’s controlling shareholder and parties acting in concert as a result of mounting debts and solvency issues.
Yuetai Group’s situation is not unique, even as public records on the Shanghai bourse show alleged mismanagement of funds and that the company has been in financial doldrums in recent years.
It stands alongside scores of Chinese developers in mainland China that have failed one or more of the government’s “red line” criteria on the property development sector, made prominent by fellow Guangzhou player, China Evergrande Group’s financial crisis.
What this essentially means is that real estate developers looking to fund or refinance their projects would have to satisfy the three thresholds set by the regulators.
These criteria deem that developers should have a “70 per cent ceiling on liability to assets, a 100 per cent cap on net debt to equity, and cash to short-term borrowing ratio of at least one”, as identified by Bloomberg.
“Developers will be categorised by how many of the three red lines they violated, and their debt growth will be limited accordingly but if a company passes all three, it can raise its debt by a maximum of 15 per cent in the next year,” said Bernard Aw, an economist for Asia Pacific.
He said the aim for the red line policy is to reduce financial risks in their real estate sector by curbing excessive debt growth in Chinese property developers that have over borrowed to finance their projects and operations.
This means that highly leveraged real estate developers will likely encounter problems in seeking funds for projects as financial institutions attempt to reduce exposure in the sector.
“If the Cambodian subsidiaries of these Chinese developers are dependent on China’s financial institutions for financing, then there could be an issue with access to credit if their parent company has violated at least one of the three metrics – leverage, gearing, liquidity.
“A lack of financing may contribute to the possibility that project completions are delayed, suppliers not paid on time, and debt interest payments defaulted,” said Aw, who is with global credit insurer Compagnie Française d’Assurance pour Le Commerce Extérieur (CoFace).
Against this backdrop, Hong Kong-listed Guangzhou R&F Properties Co Ltd has been struggling to raise funds to repay its maturing debts, only recently managing to secure $2.5 billion by disposing of one of its subsidiary and borrowing from its major shareholders.
Moody’s Investors Service Inc, downgraded its credit rating on R&F Properties to B2 from B1, indicating its fixed income obligation are “speculative and are subject to high credit risk”.
Given the limited access to funds amid refinancing needs, Fitch Ratings, which also downgraded R&F Properties’ bonds which will mature in 2022, turned its outlook to negative from stable, echoing Moody’s call.
Back home, R&F Properties’ $2 billion City project on Hun Sen Boulevard soldiers on to ensure delivery of two phases of 20 condominium buildings by 2023. Phase one is apparently complete, according to a staff earlier this year.
Its Facebook page continues to entice buyers with low interest rate loans and progress news on the blocks.
However, about 1km away on Monivong Boulevard, the group’s Glory project, which would feature 57-storey condominium towers, has been at a standstill for many months despite being partially built.
R&F Properties in China could not be reached at its Guangzhou and Hong Kong offices. However, its Cambodian office responded via a social messaging app that owing to the pandemic, the project has been “delayed temporarily”.
Foreign direct investments (FDI) in real estate and construction has in the past five years fuelled Cambodia’s economy, and with that Chinese investments in that segment had been robust since the Belt and Road Initiative in 2017.
In 2019, up to 40 per cent of total FDI was made up of Chinese investments in the construction and real estate sector, the World Bank said in May last year.
Overall, Chinese FDI has grown to become the largest contributor, coming in at 51 per cent, as of December 31, 2020, the National Bank of Cambodia (NBC) stated.
Following rapid expansion in the last few years, the real estate and construction sector recorded negative growth as a result of stalled projects in the wake of the pandemic.
Value of investments in construction dropped 32.1 per cent to $7.8 billion in 2020 from $11.4 billion whereas FDI inflows to the segment including real estate slipped 10.6 per cent year-on-year.
That being said, Cambodia’s real estate sector, particularly involving Chinese investors, remains at risk of a contagion effect from Evergrande going forward.
A report by Moody’s this week states that the potential weakness in China’s real estate market following the escalation of Evergrande’s financial distress is credit negative for China’s financial institutions.
But any potential direct loss is manageable in the context of Chinese financial institutions’ large asset bases and loss-absorbing buffers, it said.
However, Evergrande’s financial distress could trigger a “significant and industry-wide deterioration” in property developers’ funding access and property sales.
This might have a significant effect on Cambodia, given that the business model for Chinese developers involves promoting the idea of overseas investment and resort lifestyle, which until recently spurred the growth of high-end condo units in choicest locations.
“The trend towards Chinese developers building overseas and selling to a domestic audience is certainly under pressure,” said James Hodge, managing director of CBRE Cambodia.
But, this is not unique to overseas projects either, with projects in China itself also impacted by measures designed to cool the Chinese real estate markets.
“This is probably going to lead to a reduction in activity from Chinese developers in Cambodia, but each has a unique situation, target and approach, so there isn’t going to be one size fits all answer,” he told The Post.
Lending availability risk
Explaining that the troubles being faced by Evergrande have their roots in Chinese government regulations aimed at cooling China’s real estate markets, he said the policies have also had an impact on Cambodia’s real estate markets.
Beyond that, the fallout of Evergrande’s problems hold the potential to impact the Kingdom’s market further.
“Evergrande’s plight highlights that speculatively building condominiums not backed by end user demand is inherently risky, and therefore could make lenders reassess their position in the the sector. Reductions in lending availability is a clear risk for the Cambodian market,” he said.
Granted, Phnom Penh’s entire condominium market is many times smaller than even Evergrande alone.
But, while there are “certainly questions about how to respond effectively to reduced demand and the models sustainability”, he said these could be answered “quite quickly by comparison”.
“And ultimately by answering these questions we should end up with a market that functions better for all,” Hodge said.
That said, with high gearing, and financial institutions’ reluctance to lend, he thinks that most developers would use debt financing of one form or another to finance their project.
“Leveraging provides them with many advantages, but of course [it] also increases risk in the instance their cash flow becomes disrupted,” he said.
Oversupply, price dips
Earlier in the week, CBRE’s third quarter report for 2021 spoke about the rise in condominium supply in the market, around 30,000 units as of September 30, which had moderated pricing and rental rates on the back of declining occupancy rate due to the pandemic.
In that time, 1,586 high-end and mid-range units entered the market following the completion of The Peak on Koh Pich by Singapore-Cambodia joint venture firm Oxley-Worldbridge (Cambodia) Co Ltd and Singapore developer TA Corp Ltd’s The Gateway on Russian Boulevard. This pushed up supply by 5.6 per cent quarter-on-quarter (q-o-q).
Based on CBRE’s data, prices for mid-range units, the most popular segment among Phnom Penh house buyers at 48 per cent market share, slipped 2.95 per cent q-o-q.
Affordable and high-end units also recorded dips in sale pricing of 2.14 per cent and 1.78 per cent, respectively.
“These reductions were less than the previous quarter, likely due to developer’s already having eaten into margins in a bid to attract prospective buyers,” the local affiliate of US commercial real estate services and firm CBRE Group Inc said.
A compounding factor to that could also be the average five per cent guaranteed rental returns (GRR), a deal sweetener that foreign developers factored in their sales pitch in the past. But could this practice continue under current circumstances?
“GRRs are certainly being viewed with more scepticism,” said Hodge, adding that the lure isn’t something that is unique to Cambodia.
“In fact, there have been several instances of problems arising from the Thai market, which is similarly disrupted. This isn’t to say that all GRRs are equal, buyers will carry out more due diligence and check for themselves whether they believe the GRR is sustainable,” he said.
CoFace’s Aw, who is based in Singapore, said Cambodia’s property sector suffers from a supply overhang after years of construction and real estate boom.
Measures taken to contain the spread of the pandemic hurt external demand for Cambodian’s commercial and residential property market, which contributed to reduced construction activity.
“The recovery of [the] construction sector is linked to a few factors, including the relaxation of travel restrictions and quarantine rules, and whether foreign demand for Cambodia’s real estate market will pick up,” he told The Post via email.
‘Elephant in the room’
This circles back to the question whether Evergrande might have put into motion the way Chinese developers do business overseas, seeing how the policies have laid bare the discrepancies in many of these companies’ balance sheets, with defaults anticipated on bond payments.
There are possibilities there, given the net losses recorded by Chinese property developers in the past year, with Yuetai being an example relating to Cambodia.
R&F Properties recorded a 18.8 per cent drop in net profit at 3.2 billion yuan ($494.1 million) in its first half ended June 30, 2021 compared to the corresponding period last year.
In a commentary by Aw on Channel News Asia last month, he cited how Singapore developer City Developments Ltd disposed of its 51 per cent-interest in China-based Sincere Property Group in a bid to cut its losses after the latter was sued for bankruptcy.
Looking at these events, some analysts comment that it could signal a fear among investors to work with Chinese developers.
David Van, senior associate public-private partnership of Cambodia-based Platform Impact Co Ltd, the impending collapse of China’s largest developer is a cause for concern globally, seeing that the government seemed unwilling to bail it out.
It could trigger the fall of subsequent Chinese large developers as well within the first half 2022 should the domino theory apply, according to experts.
“We should carefully monitor any potential financial tsunami erupting from such predicaments, given that the majority of our real estate sector has been funded this past decade with Chinese hot money,” he shared.
As it stands, Van said, industry players are already talking of an oversupply of condo units in the market and with the Chinese government tightening outflow of capital, negative repercussions may ensue for the local property market here.
“However, the elephant in the room is not much Chinese developers woes but the undeclared local governments’ loans at risk throughout China that may trigger a financial crisis of global proportion as international markets are closely knitted,” Van stressed.
Taking over bankrupt projects
In the meantime, Hodge noted that major repositioning has been taking place, most involving foreign developers because of their broad focus on foreign buyers for the bulk of demand.
“As foreign markets have been less accessible, they have had to pivot further to focus on the requirements of local buyers. Typically, this has meant a change in pricing, but also payment terms and handover condition,” he said.
Dan Davies, executive director of property asset management firm DA&G in Phnom Penh, feels that many of the developers would be highly leveraged and rely heavily on the Chinese investor market and use sales as a way of funding projects.
He said in Phnom Penh particularly, the notion of which developers have funding or are relying on sales is evident “simply by driving by the sites and checking out the activity”.
“There are a lot of ‘still cranes’and quieter roads lately. However there are some developers that have carried on contracting, although they have slowed down possibly with the view that they are fully committed and that the market will recover eventually.
“They will then be in a good position to sell completed units rather than the majority selling off plan,” he said.
Kim Heang, regional operating principal of Keller Williams Cambodia and CEO of Khmer Real Estate Co Ltd, said it was difficult to gauge whether affected Chinese developers in Cambodia would be able to complete their project, as there are many types of developers.
Although industry talk speculate that there might be fewer Chinese developers investing or completing projects in Cambodia, he opined that they “will keep coming” and “will complete” their projects because Cambodia “can be a paradise and second home for their investment”.
In relation to that, he acknowledged that Yuetai has had financial problems “since the beginning” and that “many people knew about it”.
“That is not good news for us and the real estate industry in Cambodia, however, we have to accept it,” he said, adding that the impact on the local market is not negative as most of the buyers are not Cambodians.
“...sooner or later, there will be big players that [would] replace or take over [the] projects from Yuetai. Who knows it can be me or someone else,” he remarked, confident that new developers would assume control of the projects by Chinese developers that have gone bankrupt.
This article has been edited to include a comment from R&F Properties.