The credit problems of China’s real estate industry spread into its first-tier cities recently when a 220,000 square metre development project was halted by the courts after the developer ran out of cash.
The suspension of the mixed-use project belonging to privately-held developer, Shanghai Yuehe Real Estate Co was revealed in local press reports, which indicated that there are allegations that the developer had falsified sales reports to secure additional credit.
The Yuehe International Plaza project has been ordered to cease activity by the court of Shanghai’s Minhang District, and there is also action pending on the project in the city’s Xuhui district. Sources close to the project were cited as indicating that the court action was largely due to disputes between the ownership of Yuehe and banks which had backed the project.
Shanghai’s Pudong Development bank loaned RMB 240 million ($39 million) to Shanghai Yuehe for construction of Yuehe International Plaza in the northern Shanghai suburb of Jiading. The community is adjacent to the city of Taicang in Jiangsu province, and is among Shanghai’s more distant suburbs.
The project, which originally went on sale in 2012 has also faced criticism from homebuyers who were supposed to take possession of their new apartments by the end of 2013. However, the developer had already sent delay notices to buyers, and later promised to compensate customers for the delay and to deliver the promised housing before the end of 2014.
Yuehe Faking Sales Reports
Now, as a result of Yuehe’s insolvency and the resulting legal action, construction has been halted and no further sales of units in the development are to be allowed. Varying reports have been provided by the developer, agencies and other third parties as to how many units in the complex had been sold to date.
A story on local website Hexun alleged irregularities in Yuehe’s sale practices for the project, including disguising loans to the company as sales of units in the complex. According to the story, when the developer secured credit it was disguising the loan as a home sale, with Yuehe taking on an obligation to buy back the units at a later date. By using this approach the company could inflate its sales figures in the hopes of making the project look more credit-worthy to potential providers of financing.
More Trouble for China’s Real Estate Developers
The court action against Yuehe International Plaza was revealed during the same week that a Hangzhou developer collapsed under the weight of RMB 2 billion ($322 million) in debts.
In the Hangzhou case, the chairman of Zhongdou Group, a Hangzhou-based real estate developer was arrested after failing to repay an entrusted loan earlier in the month. Yang Dingguo who owns Zhongdou had been missing since June 14th after the bank which handled the entrusted loan had initiated legal action against him and his companies.
Similar to Yuehe, Zhongdou has also been accused of fabricating sales reports to help qualify for additional credit.
Real Estate Slowdown Continues to Be Felt
Smaller developers such as Yuehe and Zhongdou are being caught out as demand for new homes weakens and credit sources dry up.
Real estate transactions in China have fallen off precipitously as buyers await potential bargains and developers wait for demand to be restored.
In May Moody’s Investors Services revised its credit outlook for Chinese developers to negative from stable.