Chinese developer Kaisa?s Xian fallout highlights shanty town redevelopment risks

Shares of mainland Chinese developer Kaisa Group Holdings tumbled another 4.3 per cent on Thursday after a 7.2 per cent drop a day earlier as it faces losing its investment in an urban redevelopment project in northern Xian city, highlighting the inherent risks in such deals.

The Shenzhen-based developer has invested more than 1 billion yuan (US$150 million) in the project to transform a shanty town into a residential estate before a local developer Xian Xingzhengyuan, which Kaisa is fighting with in court for the development rights, last weekend allegedly sent excavators and forklift trucks into the construction site,injuring a Kaisa executive and several villagers. The drama is the latest development in the company?s 17-month battle over the rights to the site.

In August 2017, Kaisa acquired a majority stake in the development from Xian Xinlicheng which won the development rights in 2011, according to mainland media reports.

But a few days later, the managing committee of the village unilaterally terminated the contract it struck with Xinlicheng, and subsequently awarded the rights Xingzhengyuan. Although Kaisa won the case over Xingzhengyuan in the lower court, a higher court in Shaanxi province overturned the verdict.

On Thursday, the company told the Post that it would appeal against the judgement. Xingzhengyuan could not be directly reached for comment, but said in a statement published in local mainland press that it was ?legally entering the site and launching construction of the compensation homes for dislocated villagers?.

Analysts said the dispute showed risks attached to urban redevelopment projects, which developers were drawn to but also loathe.

On the one hand, shanty towns are often located in prime areas of cities that bode higher property values. On the other hand, these projects require massive upfront investment, including demolition and the difficulties involved in relocating and resettling residents, as well as dealing with local governments.

?The urban redevelopment projects are known for [delivering] high margins. But they are also notorious for the uncertainties and dragged out process before developers can ascertain their rights and start building. The time can be as long as five to seven years, too long for typical property development,? said Toni Ho, a property analyst with RHB OSK Securities in Hong Kong.

?Only big developers with steady cash flow can afford that.?

But they are also notorious for the uncertainties and dragged out process before developers can ascertain their rights and start building Toni Ho, RHB OSK Securities

Still, Kaisa, whose first half 2018 net income of just 5.2 billion yuan but has a track record in urban redevelopment especially in Shenzhen, has begun in recent years to expand nationally, to allay investors? concern that 57 per cent of its reserves is concentrated in the Greater Bay Area.

The problem is, unlike Shenzhen, many inland Chinese cities operate on a less rule-based mode when it comes to doing business, according to Su Dong, a land and property researcher at the Beijing-based SEEC Research Institute.

?It is very difficult to navigate the myriad of interests without the support of local governments. But the tricky point is you can?t be too close to them for fear of collateral damage from fallen officials,? he said.

In November, another developer Cifi Holdings Group had its urban redevelopment project in central Taiyuan derailed after local planners arbitrarily scrapped a land auction that would have allowed the developer to bid for legal access to the plot. Cifi and its co-developers, including Country Garden, had spent some 10 billion yuan in relocating existing residents.

Additional reporting by Pearl Liu and Bloomberg