8-9-2023 (KUALA LUMPUR) The financial crisis engulfing major Chinese property developer Country Garden Holdings is sending shockwaves across Southeast Asia, where the company’s ambitious Forest City project in Malaysia faces an uncertain future.
Country Garden, one of China’s largest private real estate developers, reported staggering losses of nearly $7 billion in the first half of 2022, and warned of possible defaults on debts owed to international bondholders. The company narrowly avoided default this week by making interest payments on dollar-denominated bonds just before a grace period expired.
But the damage has already been done. Country Garden’s financial turmoil is the latest sign of a deepening crisis in China’s property sector, which has also dragged down rivals like China Evergrande Group. And now, the fallout threatens to derail Country Garden’s crown jewel – the $100 billion Forest City development in southern Malaysia.
Forest City, a joint venture between Country Garden and the Johor state government, plans to eventually house 700,000 residents in a futuristic city built on four artificial islands off the coast near Singapore. But the project, envisioned as a showcase of Chinese-Malaysian cooperation, has stalled as Country Garden’s debts mount.
On a recent visit, parts of Forest City resembled a ghost town, with numerous vacant shops and restaurants. Court documents ordering tenants out for unpaid rent were posted on several properties. Real estate agents offered steep discounts – up to 30% – to fill empty short-stay apartments.
Analysts warn that Country Garden’s precarious finances could hinder its ability to secure additional funding needed to continue Forest City’s development. The project is only around 15% complete so far. A funding crunch could scare away potential homebuyers and commercial tenants.
“Such domino effect will be the worst scenario,” said Samuel Tan of Malaysian property consultancy KGV International in Johor.
While the full $100 billion gross development value of Forest City does not represent immediate costs for Country Garden, the company still needs to finance extensive infrastructure, land reclamation and construction in the years ahead, Tan explained.
Country Garden insists it has “sufficient net assets and land reserves” to continue the project. But the company declined to comment on whether it could insulate Forest City from its broader debt problems, or if it has any plans to restructure the development.
If Country Garden hits a funding wall, it could be forced to sell part of its 60% stake in Forest City, take on new partners, or dispose of land and properties, said analyst Khoo Zing Sheng of AmBank Research in Malaysia.
Another option would be to divide Forest City into smaller zones and sell them off to specialized developers, Tan suggested. This could allow Country Garden to recapitalize while ensuring the mega-project’s completion.
The creation of a special economic zone by Malaysia’s new prime minister may provide a lifeline. The zone will offer tax breaks and other incentives aimed at drawing foreign investment and skilled workers to Forest City.
“The timing is opportune for Malaysia,” Khoo said, presenting an alternative to rising costs in neighboring Singapore.
But some local residents remain skeptical. They worry taxpayers could end up footing the bill if the Johor government has to bail out the project as Country Garden withdraws.
On the ground, there were some tentative signs of a rebound, as pandemic restrictions eased in Malaysia and China. A convenience store owner said business is improving, with new shops slated to open. Help wanted signs have appeared in storefronts.
Yet unless Country Garden can turn around its finances, the promise of a utopian, smart city rising from the sea may never materialize. The developer’s woes offer a cautionary tale of the risks when Chinese capital goes abroad, and grand visions collide with economic realities.
