Ou Zongrong stood by it, constructing a property empire with its roots within the province.
At first, issues labored out nicely. Now the tide has turned.
In February, Ou’s Zhenro Properties Group Ltd. spooked buyers by saying it could not have money to redeem a perpetual be aware, simply weeks after promising it will. In reality, it mentioned it could not have sufficient liquidity to repay different near-term maturities.
That was a shock for buyers in a developer that had been weathering China’s large actual property disaster comparatively nicely, by no means lacking a public debt fee till then.
Zhenro’s inventory slumped on the announcement, taking its drop for the 12 months to 77%, whereas its greenback bonds plummeted to round 20 cents on the greenback from close to par in January. Ou transferred about one-third of his stake within the firm’s property-services unit to settle loans following a pressured disposal of some Zhenro shares. Market watchers started questioning the agency’s transparency, eroding already-fragile confidence within the sector’s company governance.
The newest blow got here on Wednesday, when Fitch Rankings Ltd. downgraded Zhenro to restricted default.
Zhenro’s fallout is a warning for buyers in what is called the “Fujian Gang”: publicly listed builders whose bosses got here from the province and are well-known for his or her risk-taking, even outbidding a few of China’s greatest builders. As they did so, their debt ballooned, leaving them uncovered when the federal government launched a nation-wide marketing campaign to deleverage the sector that triggered a wave of failures.
The clan, which contains no less than 11 builders traded in Hong Kong and mainland China, consists of a few of the most troubled names. Yango Group Co. and Yuzhou Group Holdings Co. are chargeable for no less than $3.24 billion of defaults on greenback bonds this 12 months — greater than half the sector’s whole — whereas many have requested buyers for extra time to repay their debt.
“Fujian-based builders equivalent to Ronshine, Yuzhou, Zhenro have been aggressively funding land acquisitions with money owed,” mentioned Dan Wang, a credit score analyst at Bloomberg Intelligence. “This has left them susceptible in a property market downturn and in a situation the place capital markets shut down.”
China’s personal housing market expanded quickly after its liberalization within the Nineties, resulting in a surge in costs for one of many few secure investments out there to the nation’s rising center class. Builders in Fujian, a province initially well-known for its attire and manufacturing companies, had been comparatively late to the property recreation and had to make use of leverage to catch up.
To assist achieve scale, many companies that originated within the province moved their headquarters to larger cities, whereas their founders or high executives sought to realize political affect. Ou, who created Zhenro’s predecessor in 1998, transferred the corporate’s foremost workplaces to Shanghai in 2016 and is a delegate for one in all China’s high advisory our bodies, together with 4 bosses from the builders with Fujian roots.
Whereas typically smaller than giants equivalent to China Evergrande Group and Nation Backyard Holdings Co., aggressive land acquisitions allowed the Fujian corporations to develop shortly. In 2016, Zhenro made headlines for purchasing a parcel in Wuhan at a peak value, outbidding a few of the nation’s high names together with Sunac China Holdings Ltd. with premiums exceeding 400%. The identical 12 months, Ronshine China Holdings Ltd. — based by Ou’s youthful brother — set a nationwide report by splashing 11 billion yuan ($1.73 billion) for a web site in Shanghai, whereas Sansheng Holdings (Group) Co. in 2020 paid probably the most ever per sq. meter for a plot within the jap metropolis of Wuxi.
The technique paid off: Income surged for the businesses from the group, rising greater than 10-fold at Zhenro and Ronshine within the six years by means of 2020. Now 5 of China’s high 30 builders have their roots in Fujian, from two in 2012.
However the fast growth led to a pile of debt, together with a big pool of cash borrowed from international buyers. Annual greenback bond gross sales by builders with Fujian roots rose ninefold from 2016 to peak at $16.7 billion in 2019, representing greater than one-quarter of all greenback debt offered by the sector that 12 months. As of March 31, the group had $32 billion of greenback bonds excellent.
Not one of the 11 builders responded to requests for remark.
Whereas China has relaxed a few of its guidelines to ease the burden on the true property market, Nation Backyard’s outcomes confirmed the hole is widening between the higher funded builders and the others. For a lot of, the outlook stays bleak as dwelling gross sales are nonetheless falling and entry to financing stays tight.
Including to buyers’ issues, Shimao Group Holdings Ltd., Powerlong Actual Property Holdings Ltd. and Ronshine are amongst people who delayed the discharge of their 2021 monetary outcomes, citing causes together with auditor resignations and the influence of Covid-19. Ronshine, which till just a few months in the past was deemed one of many most secure bets for being in compliance with the federal government’s three red-lines coverage, was downgraded deep into junk in March by each Moody’s Corp. and Fitch. In the meantime, Tahoe Group Co.’s chairman is being probed for an undisclosed offense.
“The liquidity pressure of China’s property sector is about to solid a protracted shadow over the land market,” Bloomberg Intelligence analysts Kristy Hung and Lisa Zhou wrote in a be aware. “Debt troubles for personal builders ought to sap their urge for food to speculate, as their near-term liquidity outlook fails to enhance even after policymakers’ shift to a supportive tone.”
A further drawback is that the Fujian builders usually joined forces to win massive initiatives and share the debt burden. Meaning if one is in hassle, it could simply unfold to the others. Zhenro has joint developments with builders together with CIFI Holdings Group Co., Yango and Shimao, and the greenback bonds of the latter two commerce close to report lows.
“It’s widespread for the second-tier builders to crew as much as compete towards the highest ones,” mentioned Kenny Ng, a strategist at Everbright Securities Worldwide in Hong Kong. However when the general market sentiment cools, “it might set off a sequence impact.”
The hunch has price the Fujian bosses billions. Shimao’s Hui Wing Mau, Zhenro’s Ou and Lin Zhong of CIFI have all seen their fortunes hunch. Ou is now not a billionaire, in accordance with the Bloomberg Billionaires Index.
Zhenro managed to purchase itself a while with a debt swap to cowl 5 of its notes. On Thursday, it pledged to speed up asset gross sales after reporting its monetary place weakened.
Nonetheless, Fujian builders face additional obstacles because the disaster unfolds. Greenback bonds are buying and selling at extremely burdened ranges even for builders that haven’t defaulted.
“We’ve got been cautious on the bonds issued by Fujian builders, as they’re usually extra aggressive than friends,” mentioned Zhijun Zhang, chairman of personal fund supervisor Beijing DingNuo Funding Administration Co. “Buyers expect extra bond defaults.”