(dramatic music)
- This is forest city
a mega development in Southern Malaysia,
built by the troubled chinese real estate firm,
Country Garden.
The plan was to build housing
for some 700,000 people with luxury facilities throughout.
There's a waterpark, a garden maze,
a beach that no one can swim in, and a commercial street
which will eventually be something like a shopping mall
but hardly anyone is using them.
Only about 9,000 people live here
and most of the units that you see
behind me are actually still empty.
Forest City is emblematic of some of the core issues
that have led to China's property crisis.
Like overbuilding, over borrowing, and a streak of bad luck.
So here's what Forest City tells us
about some of the challenges facing China's economy today.
Traditionally, real estate has been the main way that people
in China have grown their wealth,
buying into a booming property sector
that makes up a significant portion
of the world's second largest economy.
But over time the demand to buy has
far outstripped the amount
of housing that was actually needed.
That's led to mostly empty, unfinished developments
sometimes called ghost cities around the country
which now mainly function
as a place for investors to park their money.
The developers building them took on
huge amounts of debt,
confident that China's population would keep buying
new property, but trouble started in 2021 with the default
of China Evergrande Group triggering protests
from angry suppliers and investors trying
to recoup their losses and homeowners demanding
that their unfinished homes be completed.
The next year it was followed by Sunac China,
another major developer.
Over the past two years,
dozens of chinese real estate developers have fallen
into financial distress.
Country Garden was one of the largest survivors
and it was previously viewed
as more stable and prudent than its competitors.
Part of Country Garden's strategy within China was
to build tier three cities where land was cheap
and they had a lot of support from local government.
They were confident that over time these places would grow
and there would eventually be demand for their buildings.
They could build really big, really fast at a very low cost.
In Forest City, they tried to replicate that success.
Country Garden launched the project about a decade ago.
It's a joint venture
with the local government of the state of Johor.
Southern Malaysia is quite underdeveloped
but it's just a few miles away from Singapore,
which is one of the busiest commercial hubs
in Southeast Asia.
Initially, the project was pitched as a place
where wealthy Chinese people could have a second home
or an investment property.
It's cheaper than Singapore, but still very close by.
But in August, Country Garden estimated
that it had lost the equivalent of $7.6 billion
for the first half of 2023, and was struggling
to repay its roughly $190 billion of outstanding debts.
This is a big problem for places like Forest City.
The company says it has sold more
than 80% of its units, many of them
to Chinese investors who don't actually live here.
But the value of these units have plummeted
from an average $280 per square foot
for one bedroom units to about $116.
That's partly because Chinese buyers have been discouraged
from buying in Malaysia
with Beijing limiting overseas payments
and protectionist rhetoric
from Kuala Lumpur spooking potential buyers.
The economic downturn during the COVID-19 pandemic,
as well as China's recent real estate crisis has
also hurt the confidence of investors
in mega developments like Forest City.
But the fate of the project is still in question.
In September, Country Garden narrowly avoided defaulting
on its debts.
Now the company's creditors are waiting to see
if it will find a solution.
In a statement, the company said it was still optimistic
about Forest City's potential, but what happens here
and across China's housing market could have ripple effects
around the world.