20 June 2019

Demolition gridlock forces Shui On to throw in towel

Soon after offloading a major property project in Chongqing for 2.4 billion yuan (US$3.93 billion), Shui On Land (00272.HK) announced it will sell a key asset in Shanghai for 3.4 billion yuan.

The disposals, just days apart, highlight the developer’s deepening challenges on two fronts — liquidity and gridlock.

Shui On expects to improve its cash position and gearing by selling its entire stake in a company that owns the Shanghai Taipingqiao project to China Life Insurance (02628.HK). The developer will book a 192 million yuan gain before tax, it said in a filing to the Hong Kong stock exchange. 

More importantly, it gets a troubled project off its hands.  

Liquidity could be the smaller problem. The bigger worry strikes at the heart of Shui On’s investment strategy in the mainland — tearing down dilapidated neighborhoods and redeveloping them into showcases of modern living.

Progress has been painfully slow. Shui On is stuck in the demolition phase, unable to convince every property owner in the affected areas to give way.

The Taipingqiao project was scheduled for completion next year, but after 30 months, work has stopped. Shui On simply gave up, China Securities Times reports.

Interestingly, Shui On had completed 78 percent of demolition work on the project in 2011 but made scant progress during the whole of last year, it said in its annual report.

The biggest hurdle is so-called “nail households”, property owners who refuse to move. Any one of them can stop the process by staying put. 

The Taipingqiao project has already caused unnecessary strain on the company’s cash flow, but the group, which has invested 8.8 billion yuan in the project, still needs to spend another 3.9 billion yuan to complete it, China Securities Times reports.

Although Shui On is completely out of the project, it retains the right to buy it back within seven years, provided it can ensure that China Life Insurance will receive a 9 percent annual internal rate of return, according to the filing.

It may take some doing to shake the confidence of Shui On chairman Luo Kangrui { 羅康瑞} in the mainland property market, but by most accounts, he has had enough of the hassles of such development projects.

“I will never get involved in demolition and redevelopment projects,” Luo told Hong Kong newspaper Wen Wei Po in May. He was just beginning to grasp the problem with the benefit of hindsight.

– Contact the writer at [email protected]



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