A subsidiary of China’s largest construction group has suspended work on one of the nation’s tallest skyscrapers after the developer became the latest in a string of companies to default on a payment.
The default highlights the growing challenges faced by China’s construction groups as the slowing economy trims credit supply, putting the once runaway mega-tower building boom under stress.
In an October 30 letter seen by the Financial Times, China Construction Third Engineering Bureau Co said it would halt construction on a 475m-high skyscraper in the central city of Wuhan. It said Greenland Group, one of the nation’s largest property companies, had failed to make “a significant” project payment.
“Unfinished super tall skyscrapers, which cost a huge amount of funds to build, are a typical sign of economic recession,” said Yan Yuejin, an analyst at Shanghai-based E-house China Research and Development Institution. “They are financed by credit and will run into trouble when lenders begin to scale back.”
China reported year-on-year economic growth of 6 per cent in the third quarter, its slowest pace in 30 years.
Other cash-strapped property developers have also been struggling to keep their tall-building projects afloat. FT research reveals that construction of more than a dozen super tall skyscrapers, defined as buildings higher than 300m, has been postponed or is behind schedule.
Among them is Zhongnan Center in the eastern city of Suzhou. Construction of the 729m skyscraper would make it the second highest in the world if it were ever completed, but building work stalled shortly after construction began in 2015.
“The most rational choice for us is to construct at a slow pace until the market recovers,” said an official at Zhongnan Group, developer of the Suzhou project.
An official at Greenland, which has developed dozens of skyscrapers across the country, told the FT that the company had worked out a plan with CCTEBC and construction would resume soon. Wuhan City Government had already asked Greenland to trim the height of the structure.
If the Wuhan Greenland Center construction does proceed, it still faces an uncertain future. Office buildings in Wuhan reported a 36.2 per cent vacancy rate, a near record high, in the third quarter of this year, according to Jones Lang LaSalle, which expects the ratio to keep rising as anticipated new supply floods in.
“Demand for office space has weakened considerably due to the slowing economy,” said Cherry Hu, an analyst at Cushman & Wakefield in Wuhan. “The situation is not going to improve any time soon.”
Li Guozheng, an analyst at China Index Academy, a property consultancy, said Greenland faced a dilemma. “You can’t give up on the project because you have already invested heavily in it,” said Mr Li. “But if you go ahead, you run the risk of not being able to find renters while having to pay sky-high maintenance bills.”
Until recently, Greenland had been able to rely on selling expensive residential apartments, which it would develop adjacent to its multi-use mega buildings, to insure itself against any potential losses from empty office space. The strategy, however, is under pressure as sales of luxury homes have fallen off owing to the cooling economy and a crackdown on housing speculation.
“There is a fundamental problem with Greenland’s business model,” said Mr Li. “It doesn’t take into account an economic downturn.”