Aoyuan Sells Project in Hong Kong’s Mid-Levels at a Loss Amid Cash Flow Crisis

Cash-strapped mainland developer China Aoyuan Property Group this month agreed to sell off a redevelopment project in Hong Kong’s Mid-Levels to raise cash, and is expecting to recognise an estimated loss of HK$176.6 million on the disposal, according to an announcement to the Hong Kong Stock Exchange.

Aoyuan, which ranks as China’s 31st largest developer in terms of contracted sales as of the third quarter this year, is selling its 86.4 percent ownership of the Yin Yee Mansion at 63-67 Robinson Road to investor Norman Ng, the founder of private equity firm Oriens Capital, for HK$900 million ($115.5 million) through the disposal of sale shares and shareholder loans, according to the exchange notice.

“The net proceeds from the disposal are intended to be applied for repayment of the loan facility and general working capital of the group,” Aoyuan chairman Guo Zi Wen said in announcing the sale of its project in one of Hong Kong’s priciest residential districts.

The Guangzhou-based developer’s sale agreement came just over a week after Fitch had downgraded Aoyuan’s long-term foreign-currency issuer default rating to B+ from BB, reflecting the developer’s “decreasing financial flexibility” amid volatile markets, according to the credit rating giant.

Losing Out on a Luxury Project

Aoyuan’s asset disposal would mean that the developer is giving up a potential redevelopment project, which it predicted in 2019 would drive in sales of about HK$2.2 billion once completed, according to the Hong Kong Economic Times. With a maximum plot ratio of 5, and a gross floor area that could yield up to 54,500 square feet of housing, the property at the time was valued at about HK$500 million, the local news site reported.

Completed in 1967, the Yin Yee Mansion includes 32 separate units and occupies a 10,645 square foot (989 square metre) site in the Mid-Levels. Currently, the developer owns 28 apartment units, two rooftop sections and 26 parking spaces in the eight-storey residential building, representing 86.4 percent ownership of the property.

In March 2019, Aoyuan filed an application to the Lands Tribunal for a compulsory sale of the remaining units at the Mid-Levels mansion, holding 84.8 percent ownership of the property at the time. Adjudication for a potential compulsory sale order had been set to take place in February 2022, according to the announcement.

Should Aoyuan’s compulsory sale application be approved, the new owner will be eligible to build new housing on the Robinson Road site, which is located within a few minutes’ stroll of some of Hong Kong’s priciest addresses, such as Henderson Land’s 39 Conduit Road, which is about one block away.

The Mid-Levels disposal comes about three years after Aoyuan’s first set of purchases at the property. In March 2018, the developer acquired three units for a combined price of HK$80 million, which was reportedly 60 percent higher than the market level for units in the residential block in the year it was completed.

Just three months after its first set of acquisitions at Robinson Road, the mainland developer continued its expansion in Hong Kong, snapping up a whole 12-storey industrial building in Kwai Chung for HK$950 million. That building has since been redeveloped as a boutique office project, just a 10-minute walk from the Kwai Hing and Tai Wo Hau MTR stations, and will be Aoyuan’s remaining project in its Hong Kong land bank once the sale of its Yin Yee Mansion holdings is complete.

A Motivated Seller

Aoyuan’s decision to raise cash by selling its Mid-Levels asset came as the Guangzhou-based developer faced increasing levels of financial pressure, with its stock down by almost 71 percent so far this year, according to Dow Jones Market Watch.

In the first half of the year, profit attributable to shareholders was approximately RMB 2 billion, representing a 13.6 percent slump from RMB 2.4 billion in the same period of 2020, according to the developer’s interim report.

On 3 November, Fitch downgraded Aoyuan’s default rating, noting one of the key drivers to be the developer’s estimated RMB 8.8 billion ($1.3 billion) of debt maturing or becoming puttable through to the end of 2022.

Within that same week, the developer released a statement that Aoyuan was holding “preliminary discussions” on a possible disposal of a stake in its property management services unit, although no terms or definitive agreement had been entered into as of the announcement date.

While the developer’s total liabilities were RMB 262.8 billion as of 30 June, down from RMB 271.4 billion last December, total assets had also come down to RMB 316.1 billion from RMB 325.6 billion at 31 December.

Mainland Developers Raising Cash

Amid a liquidity crisis in China’s property sector, Aoyuan joins an industry-wide scramble to raise cash and repay debt. This month, another mainland developer, Sunac China Holdings, was reported to have raised $953 million through the sale of new shares and a stake in its property unit.

Sunac sold 335 million shares in a top-up placement that raised about $653 million, and the developer separately sold 158 million shares in its property management arm through a subsidiary to raise about $300 million, the Business Times reported.

Just two months earlier in September, Aoyuan introduced Peter Lee, an executive director and co-chairman of Henderson Land Development, to subscribe for HK$400 million in new shares, according to a Hong Kong Stock Exchange filing. Lee agreed to subscribe for nearly 107.88 million shares, representing 3.85 percent of the total shares, at HK$3.71 each.