Chinese developer Kaisa’s Xian fallout highlights shanty town redevelopment risks
- Company’s Hong Kong-traded shares have lost 11.2 per cent in two days
- Developers love and loathe shanty town projects for their high returns and high 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”.
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.