Shanghai Developer’s Default Deepens China’s Real Estate Crisis

China: In the latest blow to the real estate industry in the world’s second-largest economy, a well-known Chinese developer has joined the ranks of those who have failed to pay their debts.

A report that the Shanghai-based Shimao Group made with the Hong Kong stock exchange reveals that the company did not make the required interest and principal payments on a $1 billion bond by the specified due date of Sunday. The issuing contract for the bond stated that there would be no grace period for the principal payment.

After months of coping with increasing financial trouble, Shimao has now missed its first debt payment on a dollar bond. This comes after the company has been grappling with a variety of other financial issues.

China’s real estate industry has been lurching from one crisis to the next since 2020 when Beijing began cracking down on excessive borrowing by developers in an attempt to rein in their enormous debt and curb runaway home prices. This was done in an effort to stop runaway housing prices.
Evergrande, China’s second-largest property developer, started making efforts in the fall of last year to acquire funds to repay lenders, which caused the problems to get significantly worse. The financially challenged corporation is China’s most indebted property developer, with liabilities totaling somewhere about $300 billion. In December, Fitch Ratings deemed it to be in default of its obligations.

According to assessments conducted earlier this year by Moody’s, Shimao Group has a substantial amount of debt maturing in 2022. This debt includes bonds worth $1.7 billion that are owned by investors located in other countries, bonds worth 8.9 billion yuan ($1.4 billion) that are held by investors located in China, and “sizeable” offshore bank loans.

The businessman Hui Wing Mau established Shimao in 2001, and the company is responsible for the creation of large-scale residential developments and hotels all around the country. It is the owner of Shanghai Shimao International Plaza, which is one of the tallest buildings in the central business district of Shanghai.

The company predicted in March that its net profit for the year 2021 would be around 62 percent lower than it was for the previous year. This was mostly due to the “difficult” environment that the real estate sector was suffering at the time. The company then decided to delay the announcement of its findings till 2021, citing the lockdowns in Shanghai as the reason.

According to a document that Shimao submitted on Sunday, the company cited “significant changes in the macro climate of the Chinese property sector since the second half of 2021, as well as the impact of Covid-19” as the reason for the decision.

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Regarding its failure to make principal payments on other offshore loans, the corporation also indicated that it has been negotiating with creditors to seek “amicable arrangements.” Creditors have the ability to coerce a firm into accelerating its repayments in the absence of an agreement.

Since the bankruptcy of Evergrande, a number of prominent developers in the country, such as Fantasia and Kaisa, have failed to make their loan payments and have defaulted on their loans.
The problems facing the industry have become much more severe as a result of Beijing’s zero-Covid policy and the weakening economy. As the number of Covid cases continued to rise, China placed many of its main cities, including Shanghai, under rigorous lockdown at the beginning of this year. This had the effect of greatly impeding business activity.

The emergence of the Covid virus was accused by Sunac China, one of the leading developers in the nation, for “significantly” affecting its sales in March and April and aggravating their financial crisis. This was reported by the company a month ago. At the same time, the developer came clean and admitted that it had missed payments on a dollar bond.

According to a survey that was conducted and published on Friday by China Index Academy, a property research firm, prices for new homes dropped by more than 40 percent in the first half of this year in comparison to the same time period in the previous year in 100 different cities.

The officials are making an effort to staunch the flow of blood. They have decreased the interest rates on mortgages and loosened the limitations on buying homes in an effort to increase the number of homes that are sold. Some real estate developers have come up with innovative tactics to increase sales, such as accepting grain or garlic as a down payment or supplying pigs as a buyer incentive. These strategies have allowed them to improve sales.

Although there are signs that sales dropped less significantly in June than in prior months, the road to the recovery of the property sector will likely be “quite bumpy,” according to analysts from Nomura in a note that was released on Monday. This prediction was made in response to the fact that there are indicators that sales decreased less significantly in June than in prior months.

In the meantime, Evergrande is considering having the government take the lead on a huge plan to restructure its debt. Before the end of this month, the developer is planning to hand in their suggestions and recommendations.

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