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Residential silos in Shanghai:
Country Garden is mainly active in the lower market segments of the Chinese real estate market, building apartments for the countless migrant workers.
If the Chinese economy weakens like it is at the moment, the real estate giant will feel it immediately.
Photo: Qilai Shen/Bloomberg via Getty Images
New alarm signals from the Chinese real estate market: Country Garden was once considered the safest real estate company in China. Now the group based in Foshan in the southern Chinese province of Guangdong has warned of a massive drop in profits of around 70 percent.
The country's largest real estate developer in terms of sales now expects a profit of around 4.5 billion yuan (652 million euros) in the first six months of this year after 15.2 billion yuan in the previous year, the company said on Thursday night.
The real estate giant attributed the drop in earnings to a market downturn, government restrictions during the pandemic slowing home completions and sales, and currency losses.
Hong Kong-listed shares in the property developer slipped another 5.6 percent on Thursday, having lost around two-thirds of their value since the start of the year.
Country Garden has been one of Fortune's top 500 companies by revenue for six years and is ranked 138th this year.
Since the nationwide real estate crisis in China, however, things have not been running smoothly for the group either.
Fitch analysts downgraded the company's credit rating to junk status on Tuesday, dropping Country Garden from its previous investment-grade rating.
In contrast to a growing number of heavily indebted competitors such as Evergrande, Country Garden has not yet defaulted on interest payments, the Financial Times reports.
One reason for this is that in the past the property developer and developer was able to obtain sufficient refinancing via offshore bond markets.
But most of the company's bonds are now trading below 35 cents on the dollar after some were trading near par earlier in the year, according to Bloomberg.
In another red flag, Country Garden sold shares at a discount of around 13 percent in late July to bolster its liquidity and pay down debt.
For experts, this is an indication that even the healthiest property developers in China are increasingly in trouble.
Country Garden's competitors have struggled financially in the past as tens of thousands of Chinese homebuyers are unwilling to continue servicing their unfinished home mortgages.
The payment boycott shifts the risk to the banks.
Many regional banks in China are involved in the real estate sector and are now experiencing serious problems in some cases.
For months, several institutes have been denying hundreds of thousands of customers access to their bank deposits, which has recently led to violent demonstrations.
In contrast to its major competitors, Country Garden is mainly active in the lower market segments of the Chinese real estate market and is immediately affected by weaker demand when the economy is slowing down, as is currently the case.
Around 80 percent of Country Garden's properties are located in what are known as Tier 3 and Tier 4 cities.
Here the property developer is recruiting migrant workers who are looking for affordable housing close to their hometowns.
Prices have been falling for eleven months, house sales are declining
Home sales in the world's second largest economy have been falling for more than a year and prices have fallen for 11 straight months.
Many projects are on hold, and more and more unfinished blocks of flats are becoming visible in Chinese cities.
The market slump could also cause profits to fall at other companies, analysts say, according to the reports.
Jefferies Financial's Shujin Chen expects other private developers to report profit declines of 25 percent or more due to weak sales in the first half of the year.
Alicia García Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis, expects prices to fall further as demand falls, which will also weigh on Country Garden.
"Now even Country Garden can't basically continue pre-selling new projects because the risk of contagion is extreme."
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