KUALA LUMPUR/ISKANDAR PUTERI, Malaysia (Reuters) – As cash-strapped property developer Country Garden struggles to avoid default, its sprawling $100 billion project in Malaysia is under scrutiny from creditors even as… In which the Southeast Asian country offers financial incentives to investors. Lure of investments.
Country Garden’s Forest City development in the state of Johor next to Singapore, described as a paradise filled with turtles and white-sand beaches, aims to house 700,000 people on 7,000 acres on four reclaimed islands when it is completed in 2035.
Seven years later, Country Garden has invested 20 billion ringgit ($4.3 billion) in the project, Forest City said, a far cry from the initial $100 billion plan. Today, as development continues, it houses fewer than 10,000 people — about 1% of its goal.
Forest City has become a symbol of the risks taken by Country Garden and some of its Chinese counterparts through a debt-fueled building boom, not only at home, but also in overseas markets.
Analysts say that as it struggles with weak cash flow and a wall of repayment obligations, Country Garden’s prospects for deploying additional capital for the project now look increasingly challenging. The Chinese developer is also unlikely to see any increase in revenue from the project anytime soon.
Late last month, Forest City said the project was proceeding as planned despite issues related to the “political landscape, interference, economic stability and government policy.”
“The company is also always prepared to review and re-evaluate Forest City’s development plans after 2025 if there is a current need to do so,” it added, without going into details about its plans or the significance of the 2025 review date.
Forest City, a joint venture between Country Garden and a private Malaysian company backed by the Sultan of Johor and the state government, has faced problems ranging from environmental to regulatory issues since its establishment in 2016.
With financial pressures mounting on Country Garden, help from the Malaysian government will be crucial to the success of the development and the company may have to bring in outside investors to revive the project, said Fu Jie Jin, group managing director of real estate agency and country garden company. CBRE-WTW Consulting.
“Going forward, I think they need to split it up and invite joint venture partners to monetize some of the assets. That will be able to accelerate the development of Forest City,” he said.
The office of Malaysian Prime Minister Anwar Ibrahim did not respond to questions seeking comment on the financial problems faced by the developer.
Home facts
Forest City said about 55,000 people visit its sales gallery each month, and two 600-room hotels, including a five-star golf resort, are “always fully booked.”
“Seeing is believing,” Forest City said in an email response.
What Reuters saw during its recent trip looked completely different.
Empty palm-tree-lined roads led to a mall with a karaoke lounge, a bird’s nest museum and a herbal medicine shop among the shuttered outlets.
The four-story mall had only about a dozen stores open, and cleaners outnumbered shoppers. One hotel was largely empty and the bar above it remained closed, although its owners told Reuters in February that it would reopen in March.
The sales gallery showed a massive replica of the project, with many of the apartment complexes marked as “sold” or “quick sale.” But over the course of just one hour, only a few families visited the large showroom.
Many real estate agents said there was little demand for the units because potential buyers were concerned about the low occupancy rate, environmental concerns and lack of economic development.
“People don’t want to buy a building where there are only a few residents,” said one agent, who requested anonymity due to the sensitivity of the issue.
Another agent said his client was looking to sell a unit after three years because he was not satisfied with the pace of development.
Forest City said 28,000 residential units have been completed so far, and more than 80% of them have been sold to buyers from at least 30 countries.
Bondholder target
Country Garden has fewer overseas projects than some of its Chinese counterparts, and some analysts expect Forest City to be a target for some of its dollar bondholders if the developer is unable to meet its debt obligations.
“The plot itself is valuable,” said a bondholder at Singapore-based Country Garden, highlighting the complexities of dealing with a local government joint venture.
Last month, Malaysia’s central bank said local banks had limited exposure to Country Garden amid concerns about its financial stress.
Anwar, Malaysia’s prime minister, designated Forest City a “special financial zone” to attract investment, which Forest City said would help market it.
Anwar did not say why his government was offering the incentives, but analysts say it may be due to Country Garden’s recent financial problems, the project’s history of negative publicity, and the oversupply of properties in Johor, the highest in Malaysia.
However, for some Forest City residents, the lower prices compared to Singapore and the relaxed pace of life suit them well.
Chinese citizen Yang Minghan, who is in her thirties, told Reuters: “If it were not for my work in my homeland, I would love to live here permanently. It is a very comfortable place and the prices are affordable.”
“Although the value of houses has not increased and it is not a good investment compared to real estate in Singapore, it is really nice to live here.”
Luo Weilun, who has investments in five companies in Forest City, feels confident that China’s mortgage debt crisis will not pose any problems.
“I don’t think the problems in China are a problem. It’s a different administration and I’m also confident that Forest City has Gohar Sultan’s support.”
($1 = 4.6710 ringgit)
($1 = 1.3599 Singapore dollars)
(Reporting by Shinghui Kwok in Iskandar Puteri and A. Ananthalakshmi in Kuala Lumpur and Yantultra Ngoi in Singapore; Additional reporting by Xie Yu in Hong Kong; Writing by Anne-Marie Roantree; Edited by Lincoln Feast.
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