Property investment

Country Garden pledges refund for Forest City buyers caught in Beijing’s crackdown on capital outflows

China’s tighter capital controls are forcing developers to walk away from the domestic market when it comes to selling overseas projects

PUBLISHED : Wednesday, 05 April, 2017, 8:03am
UPDATED : Wednesday, 05 April, 2017, 8:03am

Country Garden Holdings, whose Forest City project in Malaysia is the biggest overseas project by a Chinese property developer, said it will refund money to mainland investors caught up in Beijing’s escalating crackdown on capital outflows.

The move is the latest consequence arising from Beijing’s tighter policy on capital controls, with most Chinese developers engaged in selling overseas properties now forced to shift their focus from mainland buyers to other countries.

“We have completely stopped our sales in [mainland] China,” Zhu Jianmin, vice-president of Country Garden, told the South China Morning Post last month in Hong Kong, referring to its flagship Malaysian housing project in Johor, which launched sales in 2015.

In March, the property giant closed all its Forest City sales centres on the mainland, a move first reported by the Post, after stricter government scrutiny on capital leaving China.

Country Garden halts Malaysian housing sales amid capital flight crackdown

For buyers who made down payments on properties at Forest City but are no longer able to transfer the rest of the payment out of China, “they can cancel the transaction and there is no need to pay a forfeit fee”, Zhu said.

Zhu emphasised that the project always abided by the rules and regulations of both Malaysia and China and that only about 5 per cent of buyers were considering withdrawing their purchase.

Forest City, which covers 14 square kilometres of land on four artificial islands near the border of Singapore and Malaysia and is partly backed by the royal family of the state of Johor, has to date sold nearly 17,000 units for contracted sales of about 20 billion yuan (US$2.9 billion), mostly from mainland buyers.

Since the second half of last year, Beijing has continued to roll out tightening policies to stem the flow of money leaving its borders to prevent a large drop in its stockpile of foreign reserves triggered by the yuan’s devaluation.

This year, it implemented new barriers to stop individuals converting yuan into other currencies for overseas property purchases – a practice Beijing had turned a blind eye to in the past – dealing a big blow to developers like Country Garden and mainlanders who dreamed of a home overseas.

How China’s overseas property dream turned into a nightmare

Country Garden chairman Yeung Kwok-keung, speaking in Hong Kong last month about the closure of its Forest City sales in China, said developers must follow the rules, otherwise the government would “give you a spanking”.

The crackdown has also got buyers like Vicky Wu very worried.

The 42-year-old white-collar employee from Zhuhai has been asking Country Garden for a refund of the 69,300 Malaysian ringgit (US$15,650) she paid as a 10 per cent deposit for a 59 sq metre flat at Forest City.

As a fresh measure, Country Garden has since this year required all mainland Chinese buyers to make payments in Hong Kong or Singapore, rather than on the mainland, to bypass Beijing’s capital controls.

“The salesman is chasing me for instalments but I’m hesitating,” Wu said. “I’m worried about being put on the government blacklist.”

Wu said there were more than 50 buyers in the WeChat group called “To quit Forest City and get refunds” who were waiting for refunds.

However, because Country Garden salespeople earn high commission for selling units, they may be reluctant to let buyers off the hook despite the official stance on refunds by higher management.

Iris Li, another buyer, has similar concerns. “I have a 400,000-yuan instalment due, which could exceed the limit allowed by the government, but the [Country Garden] salesperson asked me to bring several [credit] cards to complete the payment,” she said.

China only allows individuals to exchange up to US$50,000 worth of yuan into foreign currency annually.

“I feel this could violate the law at the height of the crackdown campaign, but every time I ask the salesman if this is illegal, she becomes silent,” Li said.

To close existing loopholes, UnionPay, China’s biggest interbank payments platform, last month barred mainland Chinese customers from using its transaction system in Hong Kong to pay for property, which puts buyers like Wu and Li in a deeper hole and casts a shadow over Country Garden’s efforts to collect money from its mainland buyers.

UnionPay bars Chinese buyers from swiping for Hong Kong property

“It’s very difficult for individuals to get money outside now,” said Ben Briggs, executive vice-president of Briggs Freeman Sotheby’s International Realty based in Xiamen, China.

Briggs said Chinese demand for overseas property was still strong, given rising concerns over pollution, the yuan’s depreciation and sky-high home prices on the mainland.

In the past when the policy was looser, Country Garden accepted various kinds of domestic payment methods, such as swiping credit cards at its sales centres, bank transfers and even Alipay – a PayPal-like Chinese app – to transfer funds through a mobile wallet to the salesperson. The developer also partnered with Shenzhen financial services company Flying Financial to provide mortgages to its clients, although it is unclear how Country Garden sent the money collected domestically offshore.

It’s very difficult for individuals to get money out [of China] now
Ben Briggs, Briggs Freeman Sotheby’s International Realty

“It’s impossible for [Country Garden] to do this blatantly any more,” said David Hong, head of research at China Real Estate Information Corp.

Hong said the Chinese government had always prohibited direct individual investment in overseas property projects, but when enforcing the laws it could be lenient or strict. Once capital outflows slowed, the policy could be eased again, he said.

Capital outflows from China surged to a record US$725 billion last year, compared with US$676 billion in 2015, according to the Institute of International Finance. Much of that money found its way into the overseas property market.

China’s largest office developer, Soho China, said last month that it had to abandon the sale of a Shanghai property to a potential buyer as its plan to use the proceeds to fund an overseas investment became unfeasible under the government’s tougher outbound payment controls.

Soho drops plan to sell Hongkou property, snared by China’s capital control rules

Almost US$75 billion worth of overseas Chinese investment deals were cancelled last year, a sevenfold increase in the US$10 billion in cancelled deals in 2015, according to the Financial Times.

While Chinese developers are still eyeing overseas expansion, mainland customers are no longer their first choice.

Guangzhou developer China Aoyuan Property Group, which has five residential projects in Sydney, Australia, and just bought a high-end residential project in Canada last month, said the developments would target local Chinese buyers and new immigrants.

Country Garden had also stepped up its strategy to promote Forest City to prospective buyers from Southeast Asia, Japan, South Korea, India, the Middle East, Europe and the US, the company said.

But some developers such as Dubai-based Falcon City of Wonders see it as business as usual, saying the foreign-exchange controls have not dented mainland investors’ interest in buying overseas properties.

“We target any investor who is interested,” said Salem Almoosa, chairman and general manager of Falcon City, a multi-purpose mega project in Dubai covering more than 41 million square feet and housing over 10,000 residential units, which is currently under construction.

“We don’t know how the Chinese will bring their investments to buy the properties,” Almoosa said. “But some of them are owners of businesses who should already have their assets abroad.”

Additional reporting by Daniel Ren

Beijing tightens grip on outflows

October 2016

UnionPay, the mainland’s biggest bank-card provider, banned customers from using its services to buy investment-related insurance products in Hong Kong

November 2016

The State Council was reported to be planning to ban outbound investments above US$10 billion, forbid mergers and acquisitions of more than US$1 billion outside a Chinese investor’s core business, and halt foreign real estate deals by state-owned enterprises involving more than US$1 billion

The People’s Bank of China ordered lenders to stop issuing credit cards that allow customers to transact purchases in dual currencies

January 2017

China’s foreign-exchange regulator said it would tighten scrutiny on individuals’ foreign-currency purchases and customers must pledge the money would not be used for overseas purchases of property, securities, life insurance or investment-type insurance

March 2017

UnionPay barred mainlanders from using its services for cross-border acquisitions of properties