The marketing materials for Ruyi Island, a man-made chunk of land about five kilometers northeast of the capital of China's Hainan province, depict a utopia for the wealthy. An artist's impression shows families strolling along marina boardwalks strung with fairy lights and villas nestled around palm tree-lined lagoons.
In reality, Ruyi Island - five years after construction started - remains a huge sand bank, a few cranes sitting idle. Its developer, Beijing-based Zhonghong Holding Co., is in the process of selling, or at least trying to sell, the 13 billion yuan ($2.8b) project to a competitor after burning through cash and piling up debt.
Ruyi Island offers a glimpse of the convulsions shaking China's more than 100,000 developers, who rushed to capitalize on friendly government policies, insatiable housing demand and a near-limitless supply of cheap debt in recent years.
With the government now prioritizing keeping corporate China's mountain of debt in check, the industry finds itself in the early innings of an epic shakeout.
Making matters worse, local authorities in parts of China are starting to dismantle a system where developers collect cash from buyers long in advance of finishing their homes, potentially robbing them of a major funding channel.
"If scrapping the pre-sales system takes shape, that will speed up the consolidation wave," said Zhao Ke, property analyst at China Merchants Securities Co. "It'll be survival of the fittest."
This year is on track to be the busiest on record for consolidation among China's developers, with $24.5b of deals - mostly in the form of large firms buying stakes in smaller ones - announced since January 1, data compiled by Bloomberg show.
At least six have thrown in the towel so far in 2018, announcing plans to sell all their land and exit the industry.
How developers found themselves here is a consequence of China's unique mix of economic growth, urbanization and penchant for speculation. For hundreds of millions of Chinese enriched by a booming economy, owning property became an obsession over the past decade as prices skyrocketed. On-off government efforts to cool the market only served to stoke the speculative fervor, as money zoomed into areas not affected by curbs.
For developers, it all amounted to a near-limitless business opportunity, and many went deep into debt to finance giant projects that often sold out in hours, with would-be buyers in some cases storming sales offices.
Last year, the government turned its attention to dangerous levels of corporate debt and moved to limit financing options for property companies, putting many in a precarious position. The average cash-to-short-term debt ratio among publicly traded developers fell to 128 per cent at the end of June, the lowest since 2015 and just over half the year-earlier level, Bloomberg-compiled data show. And with stocks plunging, selling shares to raise funds often isn't a viable option.
And in the next few years, developers face a mammoth wall of bond maturities.
"Very likely the act of deleveraging will kill a bunch of players," said Sean Zhang, Cushman & Wakefield's China head of financial advisory services. "Lots of companies have found the funding doors completely shut. I've started to tell some clients: don't bother financing, you'd better sell."
Zhonghong, the Beijing-based developer of Ruyi Island, illustrates Zhang's point. The developer lurched into full-blown crisis this year, defaulting on bond payments and having its stock halted after a 62 per cent plunge since Jan. 1. Financing strain has forced it to suspend construction on almost all property projects this year, including Ruyi Island. Shenzhen's stock exchange is expected to make a decision shortly on whether to delist the group.
Meanwhile, the sale of Ruyi Island to bigger competitor Kaisa Group Holdings Ltd. is in limbo after the Shenzhen bourse raised questions about how Zhonghong will use the proceeds, and the project's development status. Officials at Zhonghong declined to comment.
Kaisa, eyeing Hainan's prospects as a new free-trade zone and luxury tourist resort, said all parties are pushing ahead with the Ruyi Island deal. "The Jiangdong New District where Ruyi Island is located carries great potential," a public relations official said in an emailed statement Tuesday. "Should the acquisition succeed, the project will become a masterpiece of tourism property by Kaisa."
Among developers driving consolidation in recent years is Sunac China Holdings, whose executives quipped at a results briefing in August that it does more deals than most investment bankers. Sunac tends to rely on an in-house M&A team for its acquisitions.
A index tracking 22 major Chinese builders surged as much as 6.4 per cent in Hong Kong on Thursday, the biggest intraday gain since January, and closed 5.3 per cent higher.
"The bigger a player is in size, the more upper hand they may get during the heavier sector headwinds squeezing minnows out," E-House's Executive President Zhang Yan said. She added that land parcels owned by the top seven builders in China amounted to 35 per cent of the total held by the top 100.
Yango Group Co., a developer from Fujian province, became one of China's 20 biggest listed developers by sales last year after going on a takeover spree. In September, it paid 5 billion yuan for home builder Chongqing Yuneng Industrial Group.
"Acquisition opportunities have emerged a lot more recently," Wu Jianbin, an executive vice president at Yango, said in an interview. "Some smaller players are finding it harder to get financing, or are facing much higher costs. And so they become more willing to sell projects to us."
But the years of M&A have taken a toll on Yango, with Fitch Ratings Ltd. in October estimating the company's leverage as one of the highest among rivals of a similar size, when measured by net debt versus project inventory.
Wu said Yango is now focused on generating cash flow. "Future decisions on acquisition opportunities all boil down to one math: How much time it takes to break even," he said.
The ripples of fear are spreading as another potentially devastating development brews: Authorities in Guangdong are said to be considering scrapping a pre-sales housing system that has become firms' biggest source of financing. Already, such a ban has been quietly rolled out in one city, despite regulators saying the issue is still at the opinion-gathering stage.
How widespread the policy change will eventually become is anyone's guess, but could reshape the industry. A complete, nationwide pre-sales ban could wipe out about a third of small developers, according to China Merchants Securities' Zhao. Analyst Zhang Dawei at Centaline Group has an even more dire assessment, saying as many as half of all players could go.
The sense of urgency is growing. Every day, smaller developers come knocking on Fullsun International Holdings Group's door looking to sell assets, chief executive officer Tong Wentao said. The Fuzhou-based developer acquired 86 per cent of its land bank by area via M&A last year, data from China Real Estate Information Corp. show.
"But we've turned more cautious on investments ourselves... we don't even look at the lower quality ones now," Tong said. "Sentiment is taking a turn. The market just started to feel winter."