Evergrande management detention is worrying news for Forest City investors

REPORTS have emerged that Hui Ka Yan, chairman of China’s largest property developer – Evergrande Group – has been placed under police surveillance. According to the BBC, several former and current executives have also been detained as financial problems mount for the beleaguered developer.

In a statement on Thursday (Sept 28), Evergrande said Hui “has been subject to mandatory measures in accordance with the law due to suspicion of illegal crimes” without giving any further detail.

Evergrande shares have also been suspended from trading – just a month after a 17-month ban was lifted – a development which saw the shares losing up to 90% of its value. Evergrande said its shares would remain suspended until further notice.

Hui Ka Yan (Pic credit: Bloomberg)

This latest episode marks another low for the heavily indebted property giant which defaulted in 2021, triggering China’s current real estate market crisis.

Hui was once listed as China’s wealthiest individual with a net worth estimated at US$$42.5 bil but that number has shrunk significantly in light of Evergrande’s recent travails.

Fearing the worse

Property buyers who have invested in Johor’s mammoth Forest City project will be following this news closely. Forest City is a joint venture between Country Garden Holdings Co Ltd with Kumpulan Prasarana Rakyat Johor Sdn Bhd and the Johor ruler Sultan Ibrahim Sultan Iskandar through Esplanade Danga 88 Sdn Bhd.

There are genuine fear’s that the real estate crisis in China could adversely impact the ability of Country Garden which is the largest real estate developer in China in terms of sales to complete the Forest City development.

Already being dubbed a ‘ghost town’ by locals with its unoccupied residential towers and empty shop lots, Forest City is a 30-year project encompassing a total planned development area of 30 sq km and Country Garden Holdings having the right for land reclamation development of four islands with an area of about 20.05 sq km.

With latest developments, Country Garden Holdings and its Malaysian subsidiary – Country Garden Pacific View Sdn Bhd (CGPV) – are again in the spotlight due to fears of a contagion effect from the debt crisis at Evergrande and the overall slowing of China’s property development sector.

Artist impression of the Forest City project from the Country Garden Pacific View Sdn Bhd’s website

When the Evergrande Real Estate Group first defaulted on its debt in 2021, local analysts monitoring the situation said the debt crisis will not have a major impact on the financial health and operations of Country Garden Holdings in Malaysia.

However, as the crisis continues to unfold two years on with suspension of Evergrande shares and the arrest of its executives, many local investors are fearing the worse. Will the latest developments suck CGPV into a credit crunch affecting its ability to complete the ambitious Forest City development as well as its other real estate projects in Johor?

At present, CGPV has two main developments in south Johor – the US$100 bil (RM465 bil) Forest City flagship mega development and the popular Country Garden Danga Bay on reclaimed land that boasts a gross development value (GDV) of US$18 bil (RM83.7 bil).

The developer also has a third project in Johor Baru called Central Park which is still under development. The project valued at US$990 mil (RM4.6 bil) is scheduled to be completed by next year.

Irony of sorts

Only last month, Prime Minister Datuk Seri Anwar Ibrahim (PMX) announced that the government has designated Forest City as a “special financial zone” to help the economy of southern Johor.

Multiple entry visas, fast-track entrance for individuals working in Singapore, and a 15% flat income tax rate for knowledge workers are among the incentives offered for the Forest City special zone.

A view of a hotel next to an office and residential apartment block in Country Garden’s Forest City development in Johor Bahru taken on Aug 16 (Pic credit: Reuters)

In a statement in end-August, Country Garden Holdings said its five Malaysian property projects are operating normally and with outstanding sales performance despite fears that the company is in debt.

According to the company, it has significant net assets and land reserves. According to The Edge, Country Garden Holdings faced total liabilities of US$194 bil as of end-2022.

Simultaneously, it said that various debt management methods are being evaluated in order to actively resolve the issue of periodic liquidity and ensure the company’s long-term future development.

Aside from the above incentives, it is urged that Putrajaya open talks with Beijing on how to resolve the issue of Forest City. To avoid it becoming the region’s biggest abandoned project, Putrajaya needs to engage with China on offering solutions that will ensure buyers – domestic or foreign – are not left in the lurch.

Similarly, the economic health of the state must be safeguarded as many smaller businesses and independent contractors have dealings with CGPV. Putrajaya must act decisively to avoid these businesses from going bust precipitating conditions that are ripe for a recession.

That is the last thing PMX needs right now – a recovering and fragile economy being rocked by foreign developments and sending it into a recession. His administration needs to act fast and decisively to avoid leaving a negative legacy. – Sept 29, 2023


Main pic credit: AFP

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