Evergrande says it will abide by orders to tear down 39 structures on its flagship property project in ‘China’s Hawaii’

Evergrande will tear down 39 buildings on Island No. 2 of its Ocean Flower project in Hainan
The demolition does not affect the remainder of the development, where 60,567 apartments have been delivered, with 628 units on their way, Evergrande said

China Evergrande Group

Pearl Liu

Published: 2:10pm, 4 Jan 2022

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China Evergrande Group said it would abide by a government instruction to demolish more than three dozen structures on one of its flagship property projects in Hainan for breaching building approval procedures, as the woes pile up for the country’s most indebted developer.

The Shenzhen-based developer will tear down 39 buildings on plot 2-14-1 on Island No. 2 of its Ocean Flower project in the Yangpu Bay on the northwestern fringe of Hainan Island in southern China, according to a statement to the Hong Kong stock exchange. Evergrande did not provide details of what those structures or buildings are.

“The company will proactively communicate and handle the case in accordance with the demolition order from the local government in Hainan,” Evergrande said, adding that the tear down does not affect the remainder of the development, where 60,567 apartments have been delivered to buyers, with 628 units on their way.

Still, the demolition order piles on the financial woes of Evergrande, which is struggling to stay afloat with 1.97 trillion yuan (US$309.3 billion) of liabilities, of which at least US$186.1 million in offshore bond payments are due this month, US$2 billion in March and another US$1.045 billion in April.

Satellite image of China Evergrande Group’s Ocean Flower Island project in Yangpu Bay on the northwestern fringe of southern China’s Hainan Island, captured by the Landsat 8 satellite on May 6, 2020. Photo: Nasa Earth Observatory.

The Ocean Flower project is a collection of five artificial islands in Yangpu Bay on the northwestern coast of southern China’s Hainan Island, often dubbed “China’s Hawaii” for its tropical climate, sandy beaches and duty-free shopping. The project measures 8 square kilometres, larger than Dubai’s Palm Jumeirah project and making it one of the world’s largest human-made islands.

Evergrande’s building permit was revoked by the Danzhou municipal authorities on December 30 because they were “illegally obtained,” according to the government’s order, adding that the buildings related to the breach had to be taken down in 10 days.

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Hainan’s provincial authorities were instructed in late 2017 to align the island’s environmental and ecological protection policies with China’s national standards, as local development projects were having a detrimental effect on the coastline and marine life.

The Hainan government imposed fines of 215 million yuan on Evergrande in 2019, citing violations of laws related to Ocean Flower Island.

Last November, the Hainan government said that it had withdrawn sale permits for 39 blocks on Ocean Flower Island No2 relating to 2,716 residential homes and 123 shops, and said it had terminated sales contracts on 328 units which had already been sold.

The government said that all 39 buildings would be used as hotels, offices, a dormitory and to provide affordable homes for “talent”.

Evergrande was also instructed by provincial authorities in Hainan and Sichuan to return land that it had left idle for years. The combination of the clampdowns, adding to Evergrande’s debt woes, is spooking investors.

“What investors are worried about is the government’s narrative tone this time,” said CGS-CIMB’s property analyst Raymond Cheng. “It seems that it is not helping Evergrande to slowly solve its debts, but to kick the company when it is down.”

Evergrande sold 54.26 million square metres of property valued at 443.02 billion yuan (US$69.6 billion) in 2021, the company said.

Bond coupon payment schedule for China Evergrande Group. Sources: Evergrande, SCMP Research

Evergrande’s shares jumped by as much as 10 per cent to an intraday high of HK$1.75 after trading resumed from a one-day halt. The shares closed 1.3 per cent higher at HK$1.61 on Tuesday.

“Whether Evergrande still has enough assets to sell and to repay creditors and whether the company’s restructuring can smoothly proceed as expected with the help of the government is now a question mark,” Cheng said.