The liquidators finally came in for Skyfame Realty on November 6. For some months, the Hong Kong-listed developer had been jettisoning assets in a bid to keep its head above water, but to no avail.
Fate is a fickle master. A day earlier, rival developer Evergrande Real Estate made its debut on the Hong Kong exchange. As Evergrande executives reflected on a job well done, they might have spared a thought for Skyfame – and mused on what might have been.
The seeds of Skyfame’s downfall were planted during the boom of 2007. The firm issued millions in bonds to raise expansion capital, but found itself unable to pay the debts when the property market collapsed the following year.
Many other developers were in a similar mess, Evergrande being the most notorious. The company funded a massive land acquisition drive through bonds that would convert to equity once it listed. But the IPO was pulled in early 2008 as the markets soured. With its commitments to creditors rising and no end in sight, Evergrande was teetering on the brink.
Evergrande avoided the plunge thanks to accommodating creditors, generous mainland banks and the fact that government incentives revived the Chinese property market. Thanks to this return to form – house prices jumped 3.9% year-on-year in October, the sharpest increase in 14 months – the company was able to re-launch its IPO.
The disconcerting aspect of this affair is how, the recent fortunes of Chinese real estate aside, nothing much has changed.
Some developers have grown wise and restrained after falling foul of the property bubble; others emerged with their reputations enhanced, having struck a sound balance between the quantity and quality of their holdings. Evergrande, however, still lives near the edge.
It remains the developer with the largest land reserves – and questions have been asked about the quality of some of these sites. It remains highly leveraged, with more than 60% of its US$1.5 billion in outstanding debt as of June 30 due within a year, although the gearing ratio has fallen. It remains wedded to revenue streams from pre-sales of properties rather than rental properties that provide reliable, longer-term cash flow.
In short, Evergrande is one of several developers overexposed to potential shifts in a volatile real estate market that is essentially still run according to government fiat. This issue is especially pertinent given recent concerns that property prices have run too far and Beijing might step in to prevent a bubble forming.
Will Evergrande and others go crashing down the next time we see a significant price correction? And will someone be there to bail them out again?