China’s real estate crisis deepens as big Shanghai developer defaults

• Further significant Chinese developer has fallen behind on its obligations.
• Shimao Group failed to pay the interest and principal on a $1 billion bond that was due on Sunday.
• The company has failed to make principle payments on other offshore debt.

Further significant Chinese developer has fallen behind on its obligations, throwing another damage to the struggling real estate market in China.

According to a company filing with the Hong Kong stock exchange, Shanghai-based Shimao Group failed to pay the interest and principal on a $1 billion bond that was due on Sunday. The offering paperwork for the bond stated that there was no principal grace period.
It marks Shimao’s first missed debt service on a dollar bond; the company has been enduring months of increasing financial strain.

Since 2020, when Beijing began cracking down on developers who borrowed excessively in an effort to reduce their enormous debt and cool off skyrocketing home prices, the real estate market in China has been lurching from crisis to crisis.

When Evergrande, the second-largest property developer in China, started struggling to acquire money to pay back lenders, the issues considerably worsened last fall. The troubled company is China’s most indebted property developer, with liabilities totaling almost $300 billion. Fitch Ratings designated it as a defaulter in December.

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Shimao Group has a significant amount of debt maturing in 2022, including $1.7 billion in bonds held by foreign investors, $1.4 billion in bonds held by Chinese investors, and “sizable” offshore bank loans, according to earlier assessments by Moody’s.

Shimao is a nationwide developer of large-scale residential complexes and hotels that was established in 2001 by businessman Hui Wing Mau. One of Shanghai’s tallest skyscrapers, Shanghai Shimao International Plaza, which is owned by the company, is situated there.

The company predicted in March that the “harsh” environment the property sector was experiencing was the main reason for their 2021 net profit plummeting by around 62 percent from a year earlier. It then postponed the publication of its 2021 results, citing the Shanghai lockdowns.

“The Group has experienced a noticeable decline in its contracted sales in recent months, which is expected to continue in the near term until the property sector in China stabilises,” Shimao said in the filing on Sunday. “Due to the significant changes to the macro environment of the property sector in China since the second half of 2021 and the impact of Covid-19.”

In regards to its failure to make principle payments on other offshore debt, the corporation continued by saying that it has been attempting to negotiate “amicable agreements” with its creditors. Without a deal, creditors can compel the corporation to make faster payments.

A number of well-known developers in the nation have fallen behind on their bills since Evergrande’s bankruptcy, including Fantasia and Kaisa.

Beijing’s zero-Covid policy and the weakening economy have made the industry’s issues worse. To combat the rise of Covid cases, China put many of its main cities, including Shanghai, under rigorous lockdown early this year, which had a negative impact on corporate activities.

One of the biggest developers in the nation, Sunac China, located in Beijing, claimed last month that the Covid outbreak “seriously” affected its sales in March and April and made its liquidity crisis worse. The developer acknowledged defaulting on a dollar bond at the same time.

According to a poll released on Friday by the property research company China Index Academy, the cost of new homes fell by more than 40% in 100 cities during the first half of this year compared to the same period in 2017.

The bleeding is being stopped by the authorities. By decreasing mortgage rates and loosening requirements for home purchases, they have increased attempts to boost home sales. Some developers have thought of creative ways to increase sales, such as accepting grain or garlic as a down payment or providing incentives to customers in the form of pigs.

Although there are indications that sales decreased less sharply in June than in prior months, Nomura analysts predicted that the road to the property sector’s recovery will be “very rocky” because Beijing is still committed to its zero-Covid strategy.

Evergrande is now putting up a significant debt restructuring strategy under government control. Before the end of this month, the developer intends to deliver his proposals.

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