Shimao Selling Stake in West Kowloon Luxury Project for $267M

Following a week of credit downgrades and plunging shares, Shimao Group Holdings on Friday announced that it has agreed to sell its 22.5 percent interest in the Grand Victoria project in West Kowloon to its joint venture partners in the luxury residential development at a loss of HK$770 million, as the troubled developer dumps assets to remain solvent.

The sale of its stake in companies controlling the 1,437 unit project to Wheelock Properties, Sino Land and SEA Holdings Limited will bring Shimao an aggregate consideration of HK$2.08 billion ($267.4 million), according to a stock exchange filing, with the sale being announced on the same day that credit ratings agency Fitch downgraded its issuer default rating and one day before Moody’s Investors Service made a similar move.

Shimao’s asset sale capped a tumultuous week for the developer, which has seen its stock plummet more than 47 percent in value since the beginning of this month as analysts point to cracks in its financial foundation and authorities raise questions about recent transactions between the group and its property management subsidiary.

In announcing its downgrade of Shimao’s issuer default rating to BB from BBB-, Fitch noted the developer’s “weak sales in recent months and financing conditions that have rapidly turned unfavorable for the company amid its deteriorating liquidity position.”

Shimao Surrenders Harbourfront Luxury

Shimao Group had earned its slice of the Grand Victoria in 2017 when it joined a consortium including Wheelock Properties, Sino Land, SEA Holdings, and K Wah International to win a tender for the site known as New Kowloon Inland Lot No. 6549.

The group paid a land premium of HK$17.28 billion for the plot, which spans a 169,510 square foot (15,748 square metre) site on 6-8 Lai Ying Street, with analysts estimating at the time that the completed project could be worth as much as HK$22 billion

Wheelock Properties, Sino Land and SEA Holdings, which are taking over Shimao’s stake, currently own a combined 55 percent of the project located less than a kilometre (0.62 miles) from the Nam Cheong MTR station, overlooking Victoria Harbour

Scheduled for completion in March 2023, the project is being sold in three phases with pre-sales for the first phase of the project in March seeing buyers snap up 89 percent of the 227 available units on launch day, reported the South China Morning Post.

Deal Spiral

Shimao’s Grand Victoria announcement came four days after its Shimao Services subsidiary on 13 December shocked the market with an agreement to buy out a property management business controlled by Shanghai Shimao, another unit of the group, for a consideration of RMB 1.65 billion ($258.7 million). The connected transaction drove regulators at the Shanghai Stock Exchange to question the necessity of the sale, and whether it would “damage” the interests of smaller shareholders.

On 14 December, Shimao cancelled agreements it had made to sell 93 flats at its residential project on 580 Pucheng Road in Pudong’s Lujiazui area, according to documents obtained by Mingtiandi, after local news reports indicated that buyers protested that the batch of houses had been used as collateral for an RMB 950 million bond before being sold.

The company had notified buyers that a refund would be issued in 30 business days, and 10 percent of the purchase price would be added to the amount as compensation, reported The Paper.

In announcing its downgrade of the developer’s corporate family rating to Ba3 from Ba1 on Friday, Moody’s pointed out that that the company has offshore bank loans and offshore bonds of around $1.7 billion, plus onshore bonds of around RMB 8.9 billion becoming due or puttable before the end of next year.

Shimao Group’s total liabilities were at RMB 463.6 billion as of 30 June, according to its interim report, up 11.8 percent year-on-year from RMB 414.3 billion in the same period of 2020.

So far this year, the group’s Hong Kong-listed shares have slid nearly 78 percent, having closed at HK$5.15 per share on Tuesday, down from its price per share of HK$23.25 on 4 January.

Mainland Developer Contagion

Shimao Group’s rush to raise cash comes amid a liquidity crisis in China’s property sector, with China Evergrande and Kaisa Group this month declared as loan defaulters. On 9 December, Fitch downgraded China Evergrande’s long-term foreign-currency issuer default rating to Restricted Default (RD). Within the same day, the credit rating agency also lowered Kaisa Group Holdings’ default rating to the same level, following the developer’s failure to repay its $400 million senior notes due on 7 December.

Adding to the defaulting developer drama, China Evergrande chairman Xu Jiayin was reportedly forced to sell more than 2 percent of his shares in the company this month, and saw his stake drop from 61.88 percent to 59.78 percent. Kaisa, also under pressure to pay off debt, last month announced the sale of its stake in a Kai Tak residential plot in a deal valued at HK$7.9 billion.