An iconic commercial building designed to be “China’s tallest” failed to sell again at a recent auction, even after a price cut of 2.6 billion yuan (approx $360 million), highlighting the spread of the real estate crisis to the commercial real estate sector in China’s current economic climate.
Unrealized Dream of ‘China’s Tallest Building’
The landmark Shimao Shenzhen-Hong Kong International Center project in Shenzhen was once ambitiously planned to be more than 700 meters (2,297 feet) tall, aspiring to become “China’s tallest building.” However, following the outbreak of a debt crisis within the Shimao Group, the developer, in 2022, the construction of the Shimao Shenzhen-Hong Kong International Center was suspended and remains halted to this day.The overall valuation of the asset is currently appraised at 16.3 billion yuan (about $2.28 billion). During the initial auction in July this year, the starting bid was set at 13.044 billion yuan (around $1.823 billion) but it failed to sell.
Following this unsuccessful first attempt, Shimao Group proposed a reduced price of 10.435 billion yuan (about $1.458 billion), a reduction of $360 million, for the second public auction on Nov. 16. Despite this significant price reduction, the project once again failed to find a new owner.
The auctioned property complex encompasses 12 plots of land designated for commercial and public building use, with a total construction area of 1.45 million square meters (15.6 million square feet). This property complex had been previously touted as the most valuable asset in a Chinese auction in nearly seven years.
In December 2017, the Shimao Group acquired the land parcel at the base price of 23.9 billion yuan ($3.37 billion). Covering an area of 321,900 square meters (3.46 million square feet), it became the second most expensive land parcel in Shenzhen’s history at the time.
The Shimao Group named it the Shimao Shenzhen-Hong Kong International Center and planned to develop it into a comprehensive project that integrates the Shenzhen-Hong Kong International Convention and Exhibition Center, smart offices, large-scale commercial spaces, and apartments.
Of particular interest to the market was the intended goal of becoming “China’s tallest building,” with plans for the building to tower to 700 meters (2,297 feet). It was also positioned to be the new landmark of eastern Shenzhen. However, for various reasons, the height was later reduced to about 600 meters (1,968 feet).
China’s Debt Crisis
In 2017, CITIC Trust issued trust products with this project as the underlying assets.However, by June 2022, CITIC Trust announced that it was having difficulty repaying 5.7 billion yuan (about $852 million) in funds under the project, leading to the suspension of the construction and triggering a debt crisis for the Shimao Group.
In an interview with The Epoch Times on Nov. 22, Lu Yuanxing, a U.S.-based political and economic analyst who used to work as a marketing executive for a Chinese company, said that in any city, a landmark building usually can fetch a high price at a public auction. However, China’s real estate market is clearly on a downward spiral so it’s hard to find any willing buyers even if prices are lowered.
In real estate, buyers are typically active in a rising market and they cool off in a falling market. The higher the prices go, the more people rush to buy, pushing the market up. But when the market starts to fall, the expectation is that it will continue to drop even further, Mr. Lu explained.
Commercial Property Giant Seeks Extension for $600 Million US Bonds
The largest company in China’s commercial real estate sector, Dalian Wanda Group, has also run into financial liquidity troubles.The property management unit of Dalian Wanda announced on the Hong Kong Stock Exchange that it is seeking an extension on its U.S. dollar bond repayment schedule for its subsidiary, Wanda Property International Limited, in order to alleviate the company’s recent liquidity pressures.
The $600 million bond was issued in January 2014 at an interest rate of 7.25 percent, and was originally scheduled to mature on Jan. 29, 2024. Wanda is in the process of obtaining consent from the holders to postpone the due date of the bond from January to December 2024 and then repay it in four installments.
This bond represents Wanda’s nearest maturing offshore dollar-denominated security. Bloomberg data shows that the company has two additional bonds due in 2025 and 2026, with a combined value of $800 million.
Wanda stated in document that its strategy is part of an effort to proactively tackle imminent liquidity challenges stemming from the bond’s maturity, economic deceleration, and increased market instability in recent years. All of these factors have impacted the group’s business operations, it said.
A few days earlier, an insider told Chinese state media that Wanda had suggested to investors a postponement of the 30 billion yuan (around $4.19 billion) principal and interest payments due by year-end, but the proposal was met with rejection from the investors.
If the company cannot be listed on the Hong Kong Stock Exchange as scheduled before the end of this year—which is the likely outcome—it will need to pay approximately 30 billion yuan in equity repurchase to pre-listing investors.
Wanda has sold five shopping malls since the beginning of this year. A person familiar with the matter told Chinese media that the sale of assets was “mainly to raise funds to pay off debts and ensure zero default.”
In addition, since July this year, Wanda has transferred its stake in Wanda Film three times, liquidating a total of about 6.762 billion yuan (roughly $945 million).
“Wanda has always been a giant in China’s commercial real estate sector,” Mr. Lu said. “During times of favorable economic conditions, banks certainly compete to provide loans to those big-name business owners and real estate developers, as the banks can earn interest and brokers can receive commissions. But now the situation has changed.
“If the banks cannot recover their loans, would they dare to continue lending? Consequently, it has become extremely difficult for these real estate companies to secure new loans.”
He further pointed out that such highly-leveraged expansion becomes perilous when the overall trend has turned downward.
“With excessive leverage and poor profitability, real estate companies are struggling to even pay the interest, let alone the principal. The recent spate of debt crises in the real estate sector is a testament to this scenario. Under the challenging overall business environment in China, the current period is certainly not an easy one for Wanda’s chairman Wang Jianlin,” Mr. Lu said.
