Price falls keep China’s property developers grounded

On the outskirts of one of China’s biggest industrial cities, across barren swampland, a 117-storey skyscraper rises through the dense smog.

When construction of Goldin Finance 117 is completed in the next two years, the world’s fifth-tallest building will offer tenants “a mesmerising architectural design”, with premium office space, a five-star hotel and an adjoining “mega high-end” shopping mall, all part of the only business district in the world to be built around a polo club.

“Xi’an has the Terracotta Army but Tianjin will have the Goldin tower and people will come from all over China to see it,” says a security guard at the site, where building work has stopped during the bitter winter in north-eastern China.

But such lofty ambitions are being brought down to earth with a bump because of the slump in China’s property market and the sharp slowdown in the country’s luxury goods industry, which has been hit by President Xi Jinping’s crackdown on corruption and extravagance.

This month Goldin Properties, the Hong Kong-listed developer, and its controlling shareholder Pan Sutong, agreed a cash injection for the project from China Cinda Asset Management, one of the state-run “bad banks” with a mission to lend to distressed companies.

Cinda and Mr Pan, a polo and wine-loving billionaire, are each putting Rmb9bn ($1.4bn) into a joint venture that will acquire Goldin 117 and the luxury shopping mall from Goldin Properties in a complicated deal that will help the company repay a loan to Mr Pan and cover some of the remaining construction costs.

Goldin Properties, which is 64 per cent owned by Mr Pan, says that it and Mr Pan together have “sufficient capital to fund the entire Tianjin project”. A spokesman said the deal with Cinda was not driven by a cash shortage but by the desire to “partially reflect and unlock the investment value of the whole Tianjin project”, which includes other office buildings, expensive apartments and the polo club.

Questions were asked about Mr Pan’s empire last year after shares in Goldin Properties and Goldin Financial, another Hong Kong-listed company he controls, soared and then collapsed for no clear reason, wiping $13bn off his paper fortune in a single day — events he decribed as “fairy tales”.

Analysts fear the Goldin development, which is meant to be the heart of a new commercial district half an hour from Beijing by high-speed train, is the wrong project at the wrong time.

Anne Stevenson-Yang, of China-focused research house J Capital, argues that the use of government-backed funds to support Goldin is symptomatic of the wider misallocation of capital weighing upon China’s economy.

“It’s a miniature picture of what China is all about, demonstrating scale in order to capture more financing,” says Ms Stevenson-Yang. “China’s asset management companies and banking establishment are dedicated to maintaining the value of their collateral because if they allow it to drop and they have to mark their real estate holdings to market, it would be a disaster for banks, depositors and cities.”

There is a very big risk of moral hazard because developers know that, in the end, the government will bail everyone out

With total Chinese debt levels perilously high, having risen from about 150 per cent of gross domestic product to more than 240 per cent over the past decade, and property prices under pressure outside “tier-one” cities such as Beijing and Shanghai, Chinese banks are reluctant to continue lending to ambitious and overstretched developers.

To resolve the debt overhang, the government is pushing asset managers such as Cinda to extend more credit to ailing companies and has proposed allowing Chinese banks to swap debt in struggling enterprises for equity.

Zhu Ning, a professor at the Shanghai Advanced Institute of Finance, believes these measures will merely exacerbate China’s fundamental problems.

“The government is using its financial arms to provide further guarantees to the real estate sector and other industries that are plagued by overcapacity,” he says. “It’s setting a bad precedent and there is a very big risk of moral hazard because developers know that, in the end, the government will bail everyone out.”

Ms Stevenson-Yang believes the $10bn Goldin Tianjin project is just the latest example of the “over-the-top utopian visions that you see all over China these days”, a function of “too much money and grandiose visions driven by a small ruling elite”.

Financial statements from Goldin Properties show the company under pressure, with property sales falling to HK$27m in the six months to September 30 from HK$479m a year earlier and the polo club and hotel — which features a French restaurant named after the chairman called Le Pan — losing HK$122m in the same period.

The company defends its record, saying Mr Pan’s strategy is to wait until the next stage of the development is complete, with prices higher than they were off-plan, before selling more apartments.

Mr Pan, who started out trading in electronics before building a diverse group that now includes French vineyards and a smartphone brand, called the Tianjin project an “art piece which I hope will be everlasting” in an interview last year at his gold-adorned office in Hong Kong.

But Mr Zhu, author of a book called China’s Guaranteed Bubble, questions whether such build-it-and-they-will-come strategies will continue to work as access to credit gets harder.

“Five years ago that would have been a valid argument,” he says. “But things have changed exactly because of this lack of respect for risks and investment principles.”