A worker walks past a Kaisa construction site in Shenzhen, South China's Guangdong Province on January 14. Photo: CFP

Just a month ago, Hong Kong-listed Kaisa Group Holdings was considered one of the top property developers in Shenzhen, South China's Guangdong Province but now it is facing a worsening financial crisis and possible bankruptcy.

The company is close to becoming the first Chinese property developer to default on offshore bonds, and its customers are worried that they may lose new homes they have already paid for if the company goes broke.

Home buyers' worry

Hundreds of people who have bought homes in Kaisa property developments gathered at one of its projects in Shenzhen on January 11, demanding that the local government protect their rights and lift a sales ban on Kaisa properties that they have paid for.

More than a thousand home buyers wrote a joint letter to the Shenzhen government demanding a solution, Beijing-based China Times newspaper reported Wednesday.

Many of these home buyers have handed over down payments and borrowed more than 1 million yuan ($161,000) from banks. But if the developer goes broke, some of its projects will be left unfinished and creditors will seize Kaisa's assets, so the home buyers will lose both their money and the properties, the report said.

From November to December 2014, the Urban Planning Land and Resources Commission of Shenzhen Municipality placed a sales ban on four of Kaisa's property projects in Shenzhen, the company said in a filing with the Hong Kong Stock Exchange on December 4, 2014.

Media reports said that the four projects include about 2,000 homes and offices, and noted that almost all of Kaisa's real estate business in Shenzhen has been suspended.

Kaisa did not reveal the reason for the sales ban in its filing.

The commission cannot give the reason for the sales ban on Kaisa's projects, and the question should be put to the municipal government instead, a member of staff at the commission who declined to be named told the Global Times Thursday.

Neither Kaisa nor the Shenzhen government could be reached for comment by press time.

The authorities can ban sales when developers or other related parties are found to be breaking laws and regulations, the commission said on its Sina Weibo Friday.

A "temporary" ban on sales can also be imposed when it is necessary, such as to regulate sales, the post said, adding that the sales ban should not be "over interpreted."

Meanwhile, the sales ban is being extended. Sales at one of Kaisa's property projects in Hangzhou, East China's Zhejiang Province, have been blocked, financial news portal cs.com.cn reported Thursday, noting that the company's other projects in Hangzhou are continuing as normal.

Sales ban

"Banning sales at property projects is very rare and it is difficult for home buyers to deal with such a sudden event," a lawyer surnamed Yi at Shenzhen-based Guangdong Xinrong Law Firm told the Global Times Thursday.

Yi said the law firm had received many calls from Kaisa home buyers, but none of them have yet decided to sue the developer or the local government.

They do not want to get into a battle with the government, and they still hope the authorities will protect them, she said.

But she also pointed out that if the sales ban continues, leading to a worse capital shortage for Kaisa, the company's unfinished projects may be abandoned, which could lead to big losses for home buyers.

The sales ban is not a formal administrative punishment and there are no laws or specific regulations for adopting or removing it, Zhang Maorong, another lawyer from Xinrong, said on his blog on January 8.

However, the effect of the ban is the same as suspending business, which is a formal administrative punishment, so the company has the right to demand that the government reconsider its decision or it can launch a lawsuit against it, Zhang said.

It is possible that the Urban Planning Land and Resources Commission was simply following the instructions of the local law enforcement authorities, Zhang said.

Zhang's speculation echoed media reports. Kaisa's troubles might have something to do with Jiang Zunyu, a Party chief in Shenzhen who is under investigation and is believed to have connections with Kaisa's former chairman Guo Yingcheng, according to a report by Shanghai-based news portal thepaper.cn on January 7.

Growing crisis

Kaisa announced on December 21 that Chairman Guo had left his post and that his brother, Executive Director Guo Yingzhi, would become a non-executive director. Kaisa's CFO Zhang Hongguang also left his post on December 29.

The abrupt departure of the executives broke the terms of a loan deal with HSBC, which meant that the company was required to immediately pay back the HK$400 million ($51.6 million) loan. Kaisa was unable to raise the money, but HSBC granted the company a temporary grace period to pay back the loan, according to an announcement by Kaisa on January 12.

Kaisa also failed to make a $26 million bond coupon payment that was due on January 8. If the company cannot pay within 30 days of January 8, it will become the first Chinese property developer to default on offshore dollar bonds, Reuters reported on Tuesday.

Banks and other institutions that have lent money to Kaisa started applying to courts to seize Kaisa's assets on January 6, Bloomberg reported Wednesday. The report also said that Kaisa may default on three trust products that are due to mature in the next six months.

There was a rumor on January 7 that the Kaisa board had decided to wind up the firm, but Kaisa denied it on the same day in a post on Weibo. Faced with its blocked projects and frozen capital, Kaisa in December 2014 planned to sell a project in Shanghai to Chinese property developer China Vanke Co for 1.2 billion yuan but the transaction was canceled, Kaisa said on January 12 without giving the reasons.

Media reports said that Vanke pulled out of the transaction to avoid a potential investigation if Kaisa goes bankrupt.

Kaisa's financial crisis has been sudden. The company has been a leading property developer in Shenzhen, ranking top in the city in terms of transaction revenue in 2014, according to its website.

Financial institutions have become cautious about lending to the real estate sector since early in 2014, and the whole industry is facing capital pressure.

Medium- and small-sized developers may also be at risk of default, as capital pressure in the industry is set to continue, Zhang Hongwei, research director at Shanghai-based property consultancy ToSpur, said in a research note on January 12.