Beijing

PAYING top dollar for land when money is cheap and then selling apartments at a premium seems like a viable business model - until a global pandemic brings both housing and capital markets to a standstill. China's developers are learning this the hard way, and the Tahoe Group is a case in point.

The Fuzhou-based home builder, known for its luxury villas, recently became the first large residential developer in China to default on a bond in five years.

Market watchers said there may be more to come. "Tahoe's default isn't isolated," said Leonard Law, a Singapore-based credit analyst at Lucror Analytics. "More defaults among weak players could emerge. Investors will be more cautious toward developers with high leverage."

Tahoe certainly fits that bill. Its overdue payments now total 27 billion yuan (S$5.37 billion), which includes loans, and it has another 55 billion yuan of borrowings that fall due before the end of the year. Its cash reserves as at March 31 were just four billion yuan.

Tahoe began snapping up expensive land plots across China in 2013. In 2015, it outbid about 20 rivals to pay an at-the-time record for a prized residential parcel in Shenzhen, its first foray into the emerging tech hub. Between 2014 and 2016, and with the nation's property market on a tear, Tahoe spent around 50 billion yuan, equal to almost 70 per cent of its contracted home sales over the period.

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One of Tahoe's developments on the outskirts of Beijing is a neat illustration of the problem. Cathay Mansion, about 30 minutes by car from the Forbidden City, had planned to advertise upscale villas at around US$2,400 per square foot (psf).

That compares with an average price of about US$628 psf elsewhere in China's capital. Tahoe bought the land in 2014 for around US$728 psf.

But in China, municipal governments approve maximum selling prices based on how housing is performing, and for the area around where Cathay Mansion is located, authorities set a cap some 30 per cent lower than what Tahoe's founding chairman Huang Qisen had hoped.

Executives put sales at Cathay Mansion on hold, only to have approved selling prices lowered by another 10 per cent as the market softened.

Companies facing a similar predicament include Yida China Holdings, which develops business parks, and Guorui Properties, which had its outlook lowered to negative from stable by Fitch Ratings earlier this year. In April, Yida defaulted on a US$300 million dollar bond.

Guangzhou G&F Properties and Sunshine 100 China Holdings are another two vulnerable firms because their unrestricted cash as at Dec 31 is not enough to cover short-term debt, said Luther Chai, a research analyst at CreditSights Singapore.

Tahoe's signature Courtyard business is one of its hardest-hit. Tahoe faces the choice of selling the premium villas, each with its own garden and concierge service, at a potential loss or holding onto them as interest costs snowball.

Some of the homes at Cathay Mansion sold early last year for around US$1,480 psf. Meanwhile, Tahoe's debt problem is not going away. Its net debt-to-equity ratio touched 548 per cent in 2014, when expansion began in earnest, and has held above 200 per cent ever since. BLOOMBERG