Sunday, September 03, 2023

The Country Garden Factor In Forest City Revitalisation Plan

Forest City is a US100bn project. Country Garden supposedly holds a 60% stake with the rest by Esplanade Danga 88 (held by Johor state interest and the Sultan of Johor. CG missed two coupon payments totaling US22.5m last month.

- Resale prices have plummeted. Units were launched and sold in 2020 for around RM1,200psf. The resale market is being done at around RM500-550psf currently.

- The venture envisages accommodating 700000 residents in waterfront apartment towers on four man-made islands spanning 30 sq km (11.6 square miles) between Malaysia and Singapore. Only 9,000 people live in Forest City despite having 28000 residential units completed thus far.

- The concept and execution looked good on paper. CG with a top-rate brand, and many Chinese would like to somehow "transfer out" their wealth and exposure overseas - thus making Forest City an easy sale. That has been thrown out the window with the sharp downturn in China's own property market. Beijing, in order to stop public funds from going offshore (capital controls), has literally made it impossible for most Chinese to buy overseas' properties. CG is stalled and the buying from China has too.

- The pandemic only exacerbated the situation. Forest City was initially approved at the state level (where most land use decisions are made) even as the project skirted national environmental regulations. Eventually, the project developer was forced to address both national and even international concerns over the project. Local stakeholders, including coastal residents, fishermen, and environmentalists, played an important role in drawing media attention to the project. Singapore also voiced its objections, and knowing Singapore is a key player in the equation, a lot of work has been spent rectifying the concerns.

- If CG undergoes liquidation, no amount of incentives will be able to lift Forest City - it will have to undergo a long process of verification and tabulation. Residents would have to undergo an administrative process to submit proof to liquidators that they are indeed the rightful owners. CG would have to realize all its assets including shares it holds with its subsidiary companies in Malaysia, and that will include the developer of the Danga Bay project – Country Garden Danga Bay. If Country Garden Danga Bay is liquidated, residents who do not already own their strata titles might be forced to show proof that they are indeed the owner of the unit.

That's the gist of it, on the negative side.

Present Times

At present, CG has two main developments in south Johor – the US$100 billion (RM465 billion) Forest City flagship mega-development and the popular Country Garden Danga Bay on reclaimed land that has a gross development value of US$18 billion (RM83.7 billion). The developer also has a third project in Johor Baru called Central Park, which is still under development. The project is scheduled to be completed by next year and is valued at US$990 million (RM4.6 billion).

Bank Negara said that banks incorporated in the country had limited exposure to Country Garden, and added that the company’s Malaysia unit was servicing loans promptly. Bank Negara Malaysia told Reuters in an e-mail: “The current development with Country Garden Holdings Ltd in China is not expected to pose any material impact on the overall property market activity and prices in Malaysia.”

Interesting Points To Consider

a) Forest City is the largest international property venture for CG. They will try to shutter everything else before they touch Forest City. If Forest City is stopped by CG, that can only mean that the company is going under liquidation.

b) The ECRL (East Coast Rail Link) is considered part of China's Belt & Road initiative (thus making it a more important factor than usual). While the KL-Johor HSR is not exactly part of that initiative, it is also considered vitally important in terms of linking right down to Singapore.

c) Not to mention the numerous projects that China has a vested interest in in Malaysia, Malaysia is a crucial political ally in making sense of the sea rights in the South China Sea. Thus making Forest City not only a CG problem but one with greater ramifications to both countries.

d) The governments of Johor and Singapore are also discussing the possibility of launching further ferry services and will study the sustainability of a prospective new route between Puteri Harbour and Tuas. Unlike the already congested Johor Bahru city center or the area surrounding the causeway, the Second Link area has lots of land banks as well as well-developed infrastructure and facilities. Furthermore, it is close to a large seaport, the Port of Tanjung Pelepas, and the intended Kuala Lumpur-Singapore High-Speed Rail (HSR) station may be relocated to Gerbang Nusajaya (as it was previously planned).

In Closing
: CG is a very important factor in trying to revitalize and complete Forest City. Our government can do all the tax reductions and easy access plans, but if CG folds, it will add another 10 years of being in the wilderness for the project.

Hence, the newsflow on CG is of utmost importance. Their viability and the timing of the recovery in China's property market need to be closely followed. 

Following the recent issue of CG not paying the USD22.5m coupon on a couple of bonds, the world was watching to see if the creditors would grant an extension. This was critical in buying time to wait for the recent Beijing measures to pump up buying in the property market to come to fruition.

The X Factor: Country Garden had delayed a deadline for creditors to vote on whether to postpone payments for an onshore 3.9 billion yuan (USD537 million) private bond last Friday at 1400 GMT, as it strives to avoid default. On Saturday, Country Garden won approval from its creditors to extend the payments to 2026, a major relief for the developer and the entire sector.

While Country Garden's liabilities are only 59% of those at Evergrande, it has 3,103 projects across China, compared with around 800 for Evergrande - making the company matter to systemic stability while also fueling contagion fears as it shows signs of financial stress. The contagion effect means Beijing would pull out all stops to ensure CG not only survives but thrives. For now, the Chinese authorities are scrambling to introduce a string of measures, including mortgage rate cuts and an easing of home purchase restrictions, to revive the property market and prop up the sputtering economy.

How Bad

Country Garden's total liabilities were about USD194 billion. It faces 108.7 billion yuan (USD14.9 billion) worth of debts due within 12 months, while its cash levels are around 101.1 billion yuan.

I strongly expect Beijing to come in with a huge injection of capital to CG very soon. Go to liquidation? Silly... what happens when they start to auction off the landbanks of CG - the ramifications are too dire. Imagine the banking loans writedowns, the domino effect on other property players, the polarising disgruntlement among the property owners with loans facing negative equity, the land auctions which will bring down sentiment and land holding asset values even further ...

Hence, overall I see an 80% chance of Beijing coming in to save the company. Judging by the USD14bn loans due within 12 months, it is likely a Beijing-led rescue will come before the year is over for I cannot see them being able to convince another group of creditors to delay/extend the loans. This is a good thing for all the property counters presently rallying around the new measures for Forest City. The related parties just have to get out the details and execute ASAP (Federal, MOF, EPA, Johor state government, Singapore government, visas, MNCs actually moving, implementation details on tax rates, HSR, ferry, etc.)

Do you have any idea how big the rally will be (for Forest City linked counters)  IF/WHEN Country Garden gets the capital injection rescue???

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