Country Garden Stops Buying Land in 3rd, 4th-Tier Cities After RMB 20B Bond Sale Aborted

China’s largest property developer by sales is reportedly retreating from an expansion program that aimed to give it a presence across the nation’s third, fourth and fifth-tier cities in the face of tightening credit conditions and an ongoing government crackdown on real estate speculation.

Country Garden Holdings has abandoned its “full coverage” program put in place late last year that incentivised local and regional managers to expand into new cities, according to a report in local state-run media outlet thepaper.cn.

The change of course by the Guangzhou-based developer comes just over a month after it dropped plans for a RMB 20 billion ($3.12 billion) domestic bond sale, as Chinese authorities cut back on credit to the nation’s real estate sector.

Cutting Back on New Land Purchases

Country Garden’s new strategy, according to company sources cited in the media account, is to halt all purchases of new land in third, fourth and fifth tier cities at least until the end of 2018. Company management is said to even be refusing to consider purchases of attractive sites adjacent to successful existing projects, in a bid to conserve funds.

Said to be driven by the goal of achieving China’s highest levels of contracted sales, in recent years Country Garden has been among the most aggressive of the mainland developers and became the country’s top-ranked home builder by sales for the first time in 2017.

Now, according to sources cited by thepaper, regional managers are commanded to focus on maintaining the company’s cashflow. The company lost access to a potential refinancing avenue at the end of May when it dropped its application for the domestic bond issue.

According to sources cited by Reuters, financial institutions working with Country Garden on the planned debenture were told that corporate bonds for real estate developers would not be approved unless they were in support of rental housing projects.

Rolling Back Project Full Coverage

Country Garden’s new, more conservative approach is a reversal from policies put in place last year by CEO Mo Bin intended to deepen the developer’s reach into small towns.

Among the 2018 key performance indicators assigned to regional managers at Country Garden last November was a requirement to extend the company’s presence in their regions into all of the third, fourth and fifth-tier cities within their territories. Failure to achieve target levels of market penetration was to be punishable to dismissal.

Just over six months into 2018, these targets have been abandoned.

Developers Face Tougher Financial Conditions

Ratings agencies have been among the market watchers already warning of adverse financial conditions facing mainland home builders.

“Chinese developers continue to face tight liquidity amid strict onshore credit conditions, but we expect most of our rated developers will be able to refinance their upcoming bond maturities,” Celine Yang, an analyst with Moody’s Investors Service said in a note published earlier this month.

In a move that parallels Country Garden’s recent discovery of fiscal prudence, top brass at Hangzhou-based developer Greentown China recently presented their line managers with a three-point program for improving the company’s finances, including “making every effort to speed up sales,” “comprehensively accelerating collection of funds” and “controlling payment outflows.”

Regulatory Crackdown Adds to Trouble

Further adding to the challenges facing China’s property developers, the country’s Ministry of Housing and Urban-Rural Development (MOHURD) late last month launched a new enforcement campaign aimed at stamping out housing speculation and controlling property price growth.

Since the end of June, officials from MOHURD), along with six other departments, have launched inspection tours in 30 cities to crack down on violations of the interests of the masses.” The campaign has seen multiple cities banning purchases of homes by companies, and, in some cases, higher tax rates for developers.