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Evergrande suffers setback as debt-stricken developer fails to sell its US$1.7 billion Hong Kong office tower to Yuexiu Property

·4 min read

China Evergrande has failed to sell its single largest asset to state-backed Yuexiu Property, Reuters reported, a huge blow to the debt-stricken developer's frantic efforts to raise the funds it needs to survive.

Guangzhou government-backed Yuexiu Property dropped a proposed US$1.7 billion offer to buy Evergrande's 26-storey office tower in Wan Chai. Reuters cited two sources saying Yuexiu's board had opposed the move over worries that Evergrande's unresolved indebtedness would create potential complications in completing the transaction smoothly.

Evergrande and Yuexiu did not respond to inquiries from the Post.

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The embattled home builder had been seeking to sell the China Evergrande Centre in Wan Chai that serves as its headquarters in Hong Kong to mainland peer Yuexiu Property for US$2 billion, Bloomberg and other mainland media reported in August. Evergrande paid US$1.61 billion for the building six years ago.

The deal was expected to be completed by the end of September, sources close to the matter had previously told the Post.

The decision to pull out came after the central bank criticised Evergrande for "poor management" at a media briefing on Friday in Beijing.

"The crisis of Evergrande's management who misjudged the market conditions, and its blind expansion [in the past] has led to a deterioration of operational and financial conditions," said Zou Lan, head of the People's Bank of China's financial markets department.

"We are urging it to accelerate asset disposals ... Financial authorities will cooperate with urban planning agencies to ensure construction restarts."

Evergrande, founded by Chinese tycoon Hui Ka-yan in 1996 in Guangzhou, is teetering on the brink of collapse with about US$300 billion in liabilities after years of borrowing to create an empire beyond its core property business that spans everything from electric vehicles to wealth management.

It missed interest payments on two dollar-denominated bonds in September, according to Moelis & Company, which is representing the bondholders.

It also missed coupon payments on its US dollar-denominated debt that was due last Monday, people familiar with the matter told the Post.

Evergrande faces a mountain of short-term borrowings, from bank loans to offshore bonds, totalling about 240 billion yuan (US$37.3 billion) due by the end of June next year.

In comparison, the developer's property portfolio had 144 billion yuan of completed apartments, houses, commercial and retail spaces ready for sale as of June 30.

That means, even without considering any expenses for marketing or human resources, Evergrande would not have enough finished property projects in its entire portfolio to generate the cash to meet its financial obligations.

It has been actively selling assets - from properties to joint venture stakes - since June as it tries to stave off a liquidity crisis.

Between the end of June and August 27, the company sold properties to suppliers and contractors to offset about 25.2 billion yuan in outstanding payments as it tries to convince suppliers who have struggled to get paid for months to continue to work with it.

It also sold stakes in Hengten Networks Group, Shengjing Bank and its bottled water business.

The company's stock has been suspended for more than a week in anticipation of a potential sale of a controlling stake in its Evergrande Property Services Group unit. Evergrande said its shares were halted ahead of an announcement about a "major transaction", but no announcement has materialised yet.

Failing to sell the trophy building in Wan Chai would be a huge setback.

Hui bought the tower, then called the Mass Mutual Tower, on Hong Kong's Wan Chai harbourfront from Chinese Estates in November 2015, for a record HK$12.5 billion (US$1.61 billion), paying more than the prevailing market price in a deal that JPMorgan's analyst described as "another example of immature capital management" by Evergrande, in a note to investors.

At the time of the deal, the building had a 100 per cent occupancy rate, but today this has dropped to around three quarters, according to property consultants Colliers.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.