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China real estate

• Newman Jiang

Another leading developer has defaulted on its debt, adding to the already deep troubles in the flailing Chinese real estate sector.

Shanghai-based Shimao Group did not pay the interest and principal on a $1 billion bond due at the weekend, according to a company filing to the Hong Kong Stock Exchange. In addition, its offering document stated that the bond carried no grace period for the principal.

Shimao has been struggling under a growing mountain of debt for months, but this is the first time it has defaulted on a payment.

China's property sector has been stumbling between one crisis and another since Beijing introduced borrowing limits for developers in an attempt to reduce their high debt and slow runaway property prices.

The problems grew massively last year when Evergrande, the second-largest property developer in China, scrambled to raise enough cash to repay its lenders. The beleaguered company is China's most in debt property developer, with around $300 billion owed. It was branded a defaulter by Fitch Ratings at the end of 2021.

According to estimates earlier this 2022, Shimao has a large amount of debt maturing this year, including $1.7 billion worth of bonds owned by international investors and 8.9 billion yuan ($1.5 billion) worth of bonds held by domestic investors, plus " substantial" offshore bank loans.

Shimao Group Holdings Ltd., formerly Shimao Property Holdings Ltd., founded by entrepreneur Hui Wing Mau in 2001, develops large-scale residential projects and hotels across the nation. The company owns Shanghai Shimao International Plaza, a 333.3 m tall skyscraper of 60 stories in Shanghai's Huangpu District, the 4th tallest in Shanghai and 100th tallest in the world.

In March, the company a that its 2021 net profit had sunk about 65% from 2020, mainly because of the "harsh" environment in the property sector. Is seeing It then put back the release of its 2021 results, blaming the lockdowns in Shanghai.

"Due to the changes to the macro environment of the property sector in China since the second half of last year and the impact of Covid-19, the Group has experienced a noticeable drop in contracted sales in recent weeks, which is expected to carry on until the property sector in China recovers," Shimao said in the filing.

Shimao also mentioned that it has been attempting to reach an "amicable resolution" with creditors on its failure to make payments on other offshore debt. Without such an agreement, creditors could force the company to speed up repayment.

Since Evergrande's bankruptcy, several well-known Chinese developers have defaulted on their debts, including Fantasia and Kaisa.

China's zero-Covid policy and a weakening economy have worsened the industry's problems. In addition, China put many of its biggest cities under severe lockdown earlier this year to fight rising Covid cases, hugely affecting business activity.

Last month, Beijing-based Sunac China, one of the country's most prominent developers, blamed the Covid outbreak for "significantly" harming its sales in March and April and further worsening its liquidity crunch. Simultaneously, the developer revealed it had defaulted on a dollar bond.

On Friday, a survey by property research firm China Index Academy showed that prices for new homes in over 100 cities fell by more than 40% in the first six months of 2022, compared with the same period in 2021.

Beijing is trying to cauterize the bleeding and has boosted efforts to rejuvenate new home sales by dropping mortgage rates and easing purchasing rules. In addition, some developers have devised imaginative ways to increase sales, such as accepting grain or garlic as a down payment to offering farm animals as incentives to buyers.

Although there are indications that sales fell less dramatically in June than in other months, the property sector's recovery will likely be quite uncomfortable, as the government doesn't seem to be in any mood to ease their widely criticized zero-Covid approach.

In the meantime, Evergrande is preparing a colossal debt restructuring plan led by the government and plans to show its proposals before the end of the month.