Forest City is a $100 billion mega project in Malaysia being developed by China's largest real estate developer Country Garden. It is an artificial island off the coast of Malaysia and in close proximity to Singapore. It was originally supposed to house luxury apartments to be sold to wealthy Chinese citizens. However, political tensions between Malaysia and China have ground development of the project to a near halt. In this video we go over what Forest City is, the current status of its development, and its implications for Country Garden.
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What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past few months. We've spent a lot of time covering the excessive risk taking in the chinese real estate industry, which has culminated with the collapse of evergrand and other real estate developers. Excessive optimism and easy to access cheap credit have motivated developers to take on more and more extreme projects. In the hopes of making huge returns, perhaps the most extreme example of this is the 100 billion dollar forest city, artificial island development.

In malaysia, this mega project was first conceived of in 2006 and was to be jointly funded by the local government in the massive chinese property developer country garden. The plan was for the new city to house 700 000 luxury apartment units, as well as five-star hotels and other luxury amenities. However, the confluence of political events, as well as the covet-19 pandemic, have turned this once great mega project into a 100 billion dollar boondoggle, where the investors stand to possibly incur huge losses. This could be a big problem for country garden, who could end up eating billions of dollars worth of losses on the project.

Country garden is china's largest property developer by sales, they're less leveraged than their peer evergreen, and thus been able to avoid financial distress, but the losses from their forest city project, as well as the broad slowdown in the chinese real estate market, could materially affect their operations. Going forward in this video we'll go over what forest city is, why it failed and what impacts this will have on country garden. First conceived in 2006, the four city project appeared to make a lot of sense. It'd be an artificial island off the southern tip of johor malaysia and in close proximity to the island nation of singapore.

Many chinese citizens either work or have kids that go to school in singapore, but limited space on the island has pushed real estate prices sky high. While not cheap by absolute terms, apartments in the forest city development were projected to sell for about one quarter, the price of equivalent properties just a few miles away in singapore, the project was to be developed by a joint venture, called country, garden, pacific view, country garden. Would own sixty percent of the jv, while malaysia's state-owned enterprise went on the remaining forty percent country garden, planned to sell properties on the island primarily to chinese citizens who would buy them as second homes? This way they can leverage their existing expertise as china's largest property developers. They plan to take advantage of the recently passed malaysia, my second home program, which gives 10-year visas to foreigners who meet minimum net worth and income requirements.

Chinese residents who could afford to buy a home in forest city island should be able to easily meet these requirements and thus attain a visa. While the business proposition sounded solid, it would not be cheap. Construction of the artificial islands started in 2014.. The entire project was expected to last 20 years and cost upwards of 100 billion dollars.
It would consist of four massive artificial islands which would house 700 000 apartment units along with hotels and shopping centers. They also plan to make it a green city with many parks and vegetation growing from the skyscrapers. There will be an elaborate network of underground parking lots and roads such as the surface will be left completely free to pedestrians, who can use a state-of-the-art rail system for transportation. There would be tourist attractions that showcase rich wildlife and surrounding seas, including seahorses sea turtles and dugong, which are close cousins of manatees.

It will be a smart city with major buildings and infrastructure digitally connected to a central operating system which can manage congestion and utilities efficiently. In their own words, it would be an exclusive and green living paradise shortly after construction started, residents from local fishing villages started complaining about reduced catches. The effect of the new artificial islands significantly impacted the natural ocean currents in surrounding coastal regions. Environmental reports found that the development, as originally proposed would result in habitat destruction and massive fish deaths, country garden agreed to reduce the size of the islands and plant protective sea grass beds in between them.

This wasn't that big of a deal and construction of the islands continued on without much interruption, but the biggest issue with the forest city project wasn't environmental or technical, but instead political. The project was originally approved by malaysian prime minister najib razak, as well as sultan ibrahim ismail, who was in charge of the johora state. They approved the project as it promised to bring billions of dollars in economic development to the region and create tens of thousands of local jobs. In 2018, prime minister najib razak lost re-election and was subsequently charged with corruption relating to a multi-billion dollar 1mdb scandal.

His replacement was mathieu muhammad, who had a much less favorable view on foreign investment in malaysia. This would become a big problem for the forest city development throughout the preceding decade. China's foreign direct investment into malaysia had increased substantially many malaysians viewed this increased investment unfavorably as they feared for an influence over important assets in the country. The forest city development, in particular, created a lot of controversy.

While the apartments were cheaper than equivalent properties in singapore. They were still slated out to be out of reach for most residents as of 2019. They had pre-sold, roughly fifteen thousand residential units. Seventy percent of these pre-sales were to chinese citizens, while only twenty percent were the local malaysians.
Many people in malaysia feared that four city would become an isolated enclave for foreign elites and be disconnected from the broader community. In 2019, country garden was hit by a one-two punch of political headwinds that were largely beyond their control. In an effort to better control their currency, the chinese government tightened their capital controls. They implemented a new fifty thousand dollar annual cap on how much that people could spend on foreign real estate with four city apartments selling for more than one hundred thousand dollars each.

This almost completely shut the doors for many chinese buyers, but an even bigger problem came from the malaysian government. In 2018, they banned foreigners from buying properties in forest city. The ban came as the new malaysian government wanted to crack down on foreigners entering the country and having significant influence within the economy. Prime minister, mahathir mohamad, said quote: one thing is certain: the city that is being built cannot be sold to foreigners.

We are not going to give visas for people to come and live here. Our objection is because a project is built for foreigners not built for malaysians. Most malaysians are unable to buy these flats unquote. The ban was a complete disaster for the project.

From the very beginning, it was designed with the intention to sell apartments to wealthy chinese citizens with foreigners banned. There would not be enough demand to sell the 700 000 units at anything close to break-even prices. After facing severe backlash for the decision, mahathir relaxed the ban on foreign buyers, but importantly, he said that buyers would not be eligible for the malaysian my second home visa program, which was the main way that chinese buyers expected to gain entry into malaysia. With this visa program gone, it is unclear how chinese citizens could obtain a long-term visa, and even if they could get a visa, many chinese buyers would be hesitant.

Given the unpredictability of malaysia's immigration policies, the chinese currency controls, along with the visa situation, dragged new pre-sales down to near zero. By the beginning of 2020, there were a few thousand chinese citizens living in four city who had purchased their properties before the bans were enacted. But with the onset of the coveted pandemic, most of them returned home and because of covet related travel restrictions, they could not return to malaysia for the foreseeable future facing the prospect of not being able to return. Many homeowners started selling their four city properties for losses.

As great as 50 percent with travel shut down, country garden wasn't selling any new apartments, and as of today, it is estimated that as little as 500 people currently live on the island in september of 2021 country, guardian announced that it was laying off two thirds of Its malaysian staff as sales of its new apartments have ground to near zero. To date, they have invested more than five billion dollars into the project at the behest of the government country garden plans to start building, affordable homes that can be purchased by malaysian citizens. Given that foreign buyers are effectively banned from buying homes, they don't really have any other options, but reducing the prices of the homes does not reduce the cost of building the artificial island in city infrastructure. The costs of building the island were budgeted under the assumption that they would sell them for high prices to wealthy chinese buyers.
Now that they'll be selling them for much lower prices, they'll almost certainly fail to recoup the cost of building the island. Today, they've only constructed one of the four planned islands. Unless things can change quickly, the other three islands will probably not be developed. Forest city is one of the biggest, if not the biggest project, that country garden is involved in the total value of the city was originally projected to be 100 billion dollars, which is five times greater than country garden's current market cap.

Despite this, the company has been almost silent about it in their financial reports. Force city is not mentioned a single time in their 2020 annual report country, guardian pacific view, which is the name of the joint venture involving forest city, is only mentioned once in a list of all of their subsidiaries, but they give zero information about its financial performance. The last time they talked substantively about forest city was in their 2016 annual report, and they just talked broadly about what the project is without giving any concrete updates about its development cost in their disclosures about the gross floor area of their real estate. All the numbers are reportedly excluding forest city.

Their disclosure about their overseas land bank also excludes forest city. The only place we've been able to find information on country garden's investment in forest city is a malaysian publication called the star.com which says that the company has spent a little under five billion dollars on it. So far, four cities being developed by a majority owned subsidiary of country garden and according to media reports, they've already sunk, almost five billion dollars into the project. The results of four city are certainly material to country, gardens group level financials.

So it seems very strange that they've made almost zero disclosures about it in their annual reports unless we're missing something, it appears that country garden doesn't want investors to pay attention to forest city. Given the problems the artificial island has experienced over the past few years, the value of the investment probably should have been marked down by billions of dollars. By now, it is not immediately obvious how big the liabilities to country garden will be if the project continues to underperform expectations. Lack of transparency has long been a problem with chinese real estate developers.
Citrons andrew left made allegations that evergrand was hiding its liabilities back in 2016. with the company's recent financial distress. It appears that left was finally vindicated. We're not saying that country garden is anything like evergrand, and this video is not financial advice, but the lack of disclosure on their massive four-city project should give investors pause.

Alright, guys that wraps it up for this video. What do you think about the forest city debacle? Why do you think country garden has given so little disclosure about it over the past few years? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.

By Stock Chat

where the coffee is hot and so is the chat

32 thoughts on “Chinese developer faces huge losses on artificial island”
  1. Avataaar/Circle Created with python_avatars fredrik payedar says:

    Isn't this typical for Chinese companies. Information about bad investment isn't disclosed period.

  2. Avataaar/Circle Created with python_avatars phanCAbe says:

    Why would any country invite a Chinese only colony built entirely by the Chinese whose profits would go to Chinese businesses? Replace any of those items with the country of origin and it wouldn't be so bad but without that absolutely not.

  3. Avataaar/Circle Created with python_avatars HY says:

    These type of overboard projects wouldn’t be allowed under Xi now!

  4. Avataaar/Circle Created with python_avatars David Renwick says:

    Warren Buffett avoids property, and that's good enough for me. I have developed several properties and done well financially but currently own none, caring to invest in local equities.

  5. Avataaar/Circle Created with python_avatars MainCoon says:

    The free world must decouple from the CCP control economy. You cannot trust the CCP dictatorship.

  6. Avataaar/Circle Created with python_avatars Scoria says:

    The massive fish deaths are because the islands reduced the currents that removed the raw sewage from the local fishing villages. Work on the raw sewage.

  7. Avataaar/Circle Created with python_avatars Bigjoe99 says:

    Country Garden and Malaysia govt cannot just stop the project. It has a RM1.5b Islamic Bond due Feb 2023 that sits on the books of many Malaysian state funds and banks.

  8. Avataaar/Circle Created with python_avatars Lin Mal says:

    A great big Chinese Ponzi scheme. Invest at your peril! Caveat Emptor !

  9. Avataaar/Circle Created with python_avatars Totally Kawaii says:

    Lesson learned: Never bet against Nature , no matter how much money you have !!!

  10. Avataaar/Circle Created with python_avatars John Savers says:

    "The best laid schemes o' Mice an' Men gang aft agley, an' lea'e us nought but grief an' pain…" [Robert Burns, To a Mouse]

  11. Avataaar/Circle Created with python_avatars Chris Ng says:

    no one asks for this.. something that doesnt benefits Malaysians

  12. Avataaar/Circle Created with python_avatars William Chao says:

    No!!!! I can't not let that happens. We must continue our freedom of navigation in South China Sea. Without those islands, we can't do freedom of navigations.

  13. Avataaar/Circle Created with python_avatars Jackulus Rypericus says:

    I like how the artists renditions contain lots of white foreigners. You have to understand the Chinese mindset on race to get this.

  14. Avataaar/Circle Created with python_avatars Jon says:

    The moral of the story…. Never invest in a country that constantly flipflops in their policies at every change of government administration.

    Investor confidence on Malaysia will not return in the following decade….. even neighbouring Singaporeans have no confidence in investing in Malaysia. They invest in Indonesia and Indo-China instead.

  15. Avataaar/Circle Created with python_avatars Poovaneswaran Supramaniam says:

    Yeah, you could thank Tun Mahathir and the Americsn Deep state shadow folks, to throw in spanner in this development, by causing a government change and runing Malaysia in the process…Typical Modus Operandi, invade weaker developing countries in the name of 'freedom'..or indirectly funding despot leaders to ruin the country's economy….absolutely despicable…

  16. Avataaar/Circle Created with python_avatars MrBoliao98 says:

    Only stupid people build anything in Johor Bahru. The only thing anyone can build there is simple terraced houses, the rest just simply don't have the money or resources to be purchased, supported or to even be sustained. No Malaysian or Singaporean if they can help it wants to live in high rises, everyone wants a small garden on the ground where it is cheaper to repair and maintain.
    Just build simple low rise houses, that is what Malaysians want. Give them a small 2000sqft plot, they can grow their serai all.

  17. Avataaar/Circle Created with python_avatars mercedescl says:

    For Malaysia, the risk is simple: 700,000 units mean 1.2 million Chinese can migrate into Malaysia and create another Singapore. Malaysia wants to compete with Singapore, not to invite a Chinese colony.

  18. Avataaar/Circle Created with python_avatars Henry Sim says:

    Advise to Malaysia GOV, forest city will never complete and country garden will just leave it that eternally and soon became a nuisance and waste of country resource that blackmail the Johorean by increasing property price causing hardship. Malaysia GOV had to be strong like while facing Singapore shouldn’t FEAR CHINA and implement LAW like penalty for uncompleted and vacant property build. If this not done the project in forest city will make Malaysia well known for afraid of China and let the China developer Shit in Malaysia without any responsibility. DO FEAR CHINA MALAYSIAN BOLEH.🥸🥸🥸

  19. Avataaar/Circle Created with python_avatars Ben says:

    The one thing that tech vapourware (Hyperloop, Spinlaunch) and real estate vapourware (forrest city) have in common is beautiful CGI renderings. I'm getting more and more wary every time I see a non-existent product advertised with CGI "demos".

  20. Avataaar/Circle Created with python_avatars Nadeem Chaudhry says:

    The great nation of China built on sand pillars starting to crumble.

  21. Avataaar/Circle Created with python_avatars Tong Cheong says:

    The moment it was conceived I already know that it will fail cos Malaysia is well known for building property halfway and leaving it unfinished for good cos every politician in Malaysia all want to dip their hands into the honey jar.

  22. Avataaar/Circle Created with python_avatars Hu Jintao says:

    Another Belt and Road Initiative "success", who is left in these projects, Laos and Pakistan!?

  23. Avataaar/Circle Created with python_avatars Duck Norris says:

    Say what you will about Country Garden but their early bird Buffet for seniors is amazing. Try the pot pie.

  24. Avataaar/Circle Created with python_avatars thomas thumim says:

    The builders biggest mistake is just to look for Chinese residents. They should of looked for people from a diverse international community example Europe and the United States

  25. Avataaar/Circle Created with python_avatars HAND FUN! says:

    Malaysia needs to upgrade slum dwellings, where most citizens live.

  26. Avataaar/Circle Created with python_avatars John Weir says:

    There's a consistent trend in Chinese companies: lack of transparency, although if people know where to look major problems can easily be found. Andrew Left (Citron Research) published his report on Evergrande nearly 10 years before their business model caught up with them. Country Garden probably has plenty of bad assets which are unaccounted for, making their books look much more attractive than they have any right to be. Fantasia has fallen, it's only a matter of time before the rest of the giant developers follow.

  27. Avataaar/Circle Created with python_avatars devonjamesj says:

    I know investors are crying but if they can’t develop the other 3 islands I don’t think that’s a bad thing.

  28. Avataaar/Circle Created with python_avatars Paulo says:

    Thanks for covering Chinese investments more than most other vloggers. I'm long Country Garden (CG) through their HKEX listing (2007), so I admit my bias. I agree that Forest City and their other Malaysian projects are likely a total loss. However lets put that in perspective among CG's other projects: its 4 projects out of 2987, 99% of which are widely distributed in mainland China. What I like about CG is that they took seriously the "three red lines" regulation imposed by the central government in 2020, while Evergrande and the other developers near bankruptcy did not. You rightly point out in your other videos that many of these developers expanded into other businesses far away from their core. CG has not done that to the same extent, even though their activities in robotics are often criticized as such. Honestly though, I view their diversification away from construction as a positive. I don't see their work in agriculture, food processing, restaurants and catering as being all that far from their core because its all based on using land. Its vertical integration in my view. This comment is too long, but I encourage readers to check out their annual and interim reports.

  29. Avataaar/Circle Created with python_avatars Gilbert Ah Sam says:

    China can never be trusted every place they go they just have no regards to the country's people and there land

  30. Avataaar/Circle Created with python_avatars joecies says:

    You know it's fantasy when they show a manatee in the water instead of it being on a buffet table.

  31. Avataaar/Circle Created with python_avatars Eżra Aydın says:

    The thing is China is literally free market capitalism, the issue that effected Evergrand was a socialist policy introduced during 2018-2019 , it took 3 years for it to finally take effect, but the free market allows them to adapt and most likely will do so, although any crash will mostly effect foreign assets owned by these officials e.t.c who will sell them off

  32. Avataaar/Circle Created with python_avatars Welkin Gunther says:

    Went to the golf resort last year. The developer didn't even bother to turn on the street lights at night

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