Large banners the size of multi-storey buildings and hoardings herald the coming launch of a Chinese mainland developer Guangzhou R&F Properties. Since 2012, it has made its presence felt buying up tracks of land.
Says a 50-something Johorean: “The Chinese developers did things in a big way. They imported grown trees for their projects and spend millions on landscaping. The effect of growns trees on the project was immediate. This impressed many Johoreans.”
The economic spin-offs were massive. But things began to change.
“We have enjoyed the land that fronts the Johor Straits, formerly Lido Beach. That is a public area. Today it is known as Danga Bay and it has become private property.”
The Danga Bay project, a joint venture between Iskandar Waterfront Holdings Sdn Bhd and Country Garden Properties (M) Sdn Bhd, a unit of China-based Country Garden Holdings, is the Chinese developer’s first foray abroad.
The mainland Chinese also irked local developers who quietly voiced their discontent. They pay premium prices for land.
The last two years, Malaysia has become the darling of Chinese developers. According to real estate consultancy Savills, Greenland Group announced in March a US$3.3bil deal in two residential and hotel projects here.
It joins smaller peers Country Garden Holdings Co Ltd, Guangzhou R&F Properties Co Ltd and Agile Property Holdings Ltd, which have invested a combined US$2.7bil in Malaysia.
In 2013, Chinese institutional and retail investors invested a total of US$1.9bil into real estate in Malaysia, exceeding the US$867mil invested in Hong Kong and US$1.8bil invested in Singapore.
“Malaysia is the cheapest in the region in terms of capital city pricing,” says IP Global chief executive of property investment consultant and underwriter Tim Murphy told Reuters in March. He likes Malaysia also because of the “strong foreign ownership level and because you can borrow money. Lenders are friendly.”
Shadow banking is a huge issue currently in China. How Chinese developers fund their projects is haunting the overall Chinese economy because a collapse in the property sector will have far reaching effects on the broader Chinese economy. The contagion effect on Malaysia would be massive.
Shadow banking, the use of funds from non-bank sources, funded most of the development in second and third-tier cities in China. Most of these projects continue to remain empty years after completion. Credit Suisse analyst Victor Wang in a May 9 report says China banks have limited direct loan exposure to the property sector but a total 54% of their loans are collateralised lending. Dropping asset (property) prices and a prolonged weak construction activity would “impact” loan quality.
“Bank of China and Industrial and Commercial Bank of China... are relatively safer banks from this angle as 7.0% and 7.7% of their 2013 loans (respectively) were lent to developers,” says Wang. Exposure of lenders to the sector may be far greater due to off-balance sheet fund raising.
While foreigners are barred from buying homes in China, they are exposed to the sector when they lend to real estate companies via bond investments.
Financial Times had reported that since 2010, foreign investors had lent Chinese real estate companies almost US$50bil and US$6bil in yuan-denominated debt, citing Dealogic. Developers accounted for a fifth or 20% of all non-financial dollar bonds sold by companies across Asia (excluding Japan) in 2013, and more than 40% of new issuance this year.
Developers also use offshore entities to borrow foreign currency using a variety of structures that link onshore and offshore companies to avoid a myriad of restrictions on capital flows. These entities may be based in Cayman Islands or the British Virgin Islands.
Last month, Country Garden postponed the launch of a US dollar bond issue, and this was perceived as yet another sign of growing concern. The Hong Kong-listed company met with investors to gauge appetite for a deal but did not press ahead with it, the Financial Times reported. A number of Chinese developers have suffered in the equity market this year.
Country Garden was planning to use funds from the proposed deal to refinance existing debt. Chinese developers have been active in the bond markets over the past two years, driving issuance in Asia.
On the local home front, Malaysia’s relatively easy laws have also attracted a considerable number of Chinese individual buyers.
The lost of flight MH370, however, has scuttled some of these deals, property consultants said. New investment instruments have resulted in the Chinese going for quick sales if sentiments turn weak or if they see unattractive returns from their property investments.
In Malaysia, Country Garden has come under scrutiny, not over funding, but its plan to reclaim 2,023 ha on the Johor Straits.
According to a source, Country Garden has been called to a meeting with the Department of Environment in the capital last week. Country Garden’s regional president Kayson Yuen said yesterday he has returned to China for a meeting.
A source said detailed studies of the site are on-going. “Country Garden is making efforts in terms of environmental management and in getting the planning right.”
The source said the layout has not been finalised although the land has been reclaimed.
