Another Chinese Property Developer Faces Trouble Amidst Real Estate Crisis

By Jonathan Walker | November 6, 2021
Jonathan loves talking politics, economics and philosophy. He carries unique perspectives on everything making him a rather odd mix of liberal-conservative with a streak of independent Austrian thought.
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Shenzhen-based Kaisa Group is finding it difficult to pay its dues. (Image: pixabay / CC0 1.0)

Ever since China’s biggest real estate developer Evergrande unraveled its financial situation, several other players from the sector have also come out admitting that they too are in a tough spot. The latest to join this group is Shenzhen-based property developer Kaisa.

On Nov. 5, shares of Kaisa Group and subsidiaries were suspended from trading at the Hong Kong stock exchange. The subsidiaries cited a “pending” announcement about the company in its filings. On Nov. 4, Kaisa had said that it was facing “unprecedented pressure” with regard to its financial situation due to the challenging real estate market environment and credit rating downgrades.

Last month, Kaisa canceled a meeting with investors. A few days later, S&P and Fitch Ratings downgraded the company, causing share prices to fall. So far this year, Kaisa’s shares have declined by over 70 percent.

According to Fitch, the company was downgraded due to uncertainty over refinancing its dollar bond maturities and coupon payments. S&P noted that Kaisa’s capital structure is “unsustainable” due to the sizable near-term debt maturities, cash flow troubles, and weakening liquidity. In December, a US$400 million debt will mature. Over the next 12 months, around $3.2 billion in offshore senior notes are due to be matured.

The company recently missed a payment linked to the wealth management products that it had guaranteed. The wealth products have 12.8 billion yuan ($2 billion) in principal and interest outstanding. 

Kaisa has apparently offered investors to pay back the dues in cash installments, paying 10 percent of the principal and then 25 percent of interest every three months. “Kaisa is a responsible firm… If you give Kaisa time, Kaisa has the ability and methods to repay,” Chairman Kwok Ying Shing told retail investors during a call.

Kaisa is presently raising funds to ease the financial pressure. As part of this, the company is planning to sell 18 assets it owns in Shenzhen valued at 81.8 billion yuan ($12.78 billion) by the end of next year, according to a document seen by Reuters

The money collected from sales will be utilized to pay off dues on the wealth management products. State-owned enterprises like China Resources Land are said to be in talks with the company to buy some of its assets.

Wealth management products in China are usually aimed at people who have a low risk appetite and want to invest in the safest possible assets. Such investments usually include monetary market and fixed-income instruments. 

As such, Kaisa’s potential non-repayment of its obligations on wealth management products can have severe consequences on the country’s investment landscape.

“The collapse of a multibillion-yuan wealth management product is not just a financial issue; it could trigger social chaos if the issuer fails to soothe investors’ concerns with concrete repayment plans… Property developers are now closely watched as the government requires them to reduce leverage ratio, sparking liquidity risks,” Wang Feng, chairman of Shanghai-based financial services company Ye Lang Capital, said to SCMP.

Meanwhile, China’s real estate market is grappling with lower sales that have added to the financial woes of developers. According to property research firm China Real Estate Information Corp (CRIC), new home sales by the country’s top 100 developers declined by 32 percent in October year-on-year. 

The September-October period is traditionally seen as an excellent time for the property sector. But the ongoing crisis has affected the market, with CRIC predicting sales to keep slowing down toward the end of the year.