My Visit to a $100 Billion “Ghost City”

It was the most ambitious development I’ve ever visited…

A $100 billion Chinese mega-project to build a brand-new city on the doorstep of one of the world’s foremost financial centers, Singapore.

But today it’s virtually abandoned—a vast “ghost city” and symbol of the wider problems afflicting China’s real estate sector. It’s an outcome I worried was possible when I visited five years ago.

When I first heard about Forest City, the scale of the project was difficult to comprehend. The plans comprised four man-made islands…nearly 12 square miles of reclaimed land…300,000 homes for an estimated 700,000 people.

It was also meant to be a city of the future. Traffic was to go underground, leaving the surface green and walkable. A traffic delay or accident? The intelligent traffic management system would adjust the traffic lights and lane use.?Lose a child in this new city? A drone would appear in seconds to help you find it.

The entire project sounded so far-fetched that I wondered if it might be a scam. I knew I had to see it firsthand. So, in 2018 I jetted off to Singapore to visit the showroom and site.

Forest City is located on the southern coast of Malaysia, but within easy commuting distance of neighboring Singapore. The showroom building itself was the size of a convention center, with giant movie screens displaying renders of the project, and individual rooms for various amenities like golf courses, malls, a water park, gyms, and a light-rail system.

I clearly remember the buzz in the cavernous venue. Everywhere, crowds of investors, most of them Chinese, were pouring over glossy brochures and pointing excitedly at enormous models in glass display cases. It was hard not to get drawn in by the euphoria and the sheer scale of the ambition.

But a quick walk around the showroom confirmed what I’d already suspected to be true—This project did not approach the level of a RETA recommendation.

It was immediately apparent that Forest City was more ambition than substance. Some high-rises and public spaces had been built at the time of my visit. And the idea of a new city neighboring Singapore but located in lower-cost Malaysia was compelling. However, the entire concept was unproven.

Would people live in Forest City in the vast numbers required? Could a brand-new city thrive in this location on the undeveloped coast of southern Malaysia? Was this futurist design even achievable? Those key questions remained unanswered.

Moreover, the project was a black box in terms of information. It had been concocted at the highest levels of power between China and Malaysia and involved opaque deals between the governments and major corporations on both sides…making due diligence impossible for ordinary investors.

Ultimately, my overriding impression was that everyone involved—from the governments to the developers to the individual investors—was taking on a higher level of risk than was apparent from the impressive models and glossy brochures.

I left with deep concerns about the risk level of the project. Those concerns, as it turns out, were well-founded…

As an investor, I’m naturally risk-adverse. Whether it’s emerging destinations, big macro trends, or ambitious project concepts, I prefer to wait for a proven track record of success. I need to see that it’s real before I put any money to work.

I first visited Tulum, on the Riviera Maya along Mexico’s Caribbean coast, in 2004…long before it became the favored beach haunt of the hipster, Instagram crowd. My team and I have spent months, maybe years, with boots on the ground in Tulum when you combine all of our trips.

Yet we’ve had only a handful of?RETA?condo deals there, the first being in 2010, because we’re extremely selective. I waited for Tulum to truly emerge, then I waited to find the right deal with the right developer. In essence, I held off on bringing a Tulum deal to RETA members until I felt sure of success.

I’ve taken the same conservative approach across our entire beat.

In Panama City, for instance, I’ve recommended deals to RETA members on a highly ambitious man-made island project called Ocean Reef. But crucially, I waited for the islands to be built first!

I wanted to survey the islands…walk the land…and see a track record of success for the communities built there. Only then did I take a deal on Ocean Reef to RETA members.

This risk-adverse approach was clearly lacking among investors in Forest City…

I’d arranged my tour of the site with the Chinese developer, Country Garden Group. The company’s representatives collected me from my hotel in downtown Singapore, and we made the 45-minute drive over the bridge across the narrow Straits of Johor to southern Malaysia.

They told me the mega-project—a joint venture between Country Garden and the Malaysian government-backed Esplanade Danga 88—was not intended to be a “suburb” of Singapore. The aim was to create something new and self-contained that could draw folks from all over the region. Part of a special economic zone offering tax and regulatory incentives for investors, it was designed as a challenger to Singapore’s economic dominance.?

I was intrigued but skeptical. My concerns only grew when I arrived at the showroom…

When I entered, I could see it was filled with middle-class Chinese investors. This set off alarm bells for me. There’s a cultural difference in how Chinese investors conceive of real estate. To them, it’s primarily a store of value, rather than a way to generate income.

This has led to the emergence of so-called ghost cities across China. Entire developments have been constructed with no rational purpose beyond attracting investors, so they end up unfinished or used by no one…which quickly leads to collapsing property values.

If Garden City were to succeed, it would need to be occupied by vast numbers of people.

I put my concerns to the Country Garden representatives. If the majority of buyers were Chinese investors rather than people who wanted to actually live there, weren’t they concerned that Forest City would go unused…that it could turn out to be history’s most expensive ghost city?

They were ready for the question, prepped with stats about how the number of ghost cities in China was low in percentage terms, and when you build projects with the frequency and scale that China does, a certain number of failures is inevitable. Forest City, they told me, would be different since it had all the ingredients for success: the ambition, the technology, the money, the backing of the Malaysian and Chinese governments, the proximity to Singapore.

It was a plausible response, but it was another black box—a claim that was impossible for me to prove or disprove. Statistics about real estate developments in China are difficult to find and harder to verify.

Anyway, I didn’t believe their claims for a second...

If you’ve been following the financial news, you’ll know that China’s real estate sector is in turmoil.

Shares of China Evergrande, the country’s top developer, have fallen by almost 99% on the Hong Kong stock exchange since July 2020. And the company has already defaulted on some of its debts, which total over $300 billion…more than the gross domestic product of New Zealand.

It’s a similar story across the industry. Dozens of major Chinese developers are failing or have gone bust. Country Garden, the developer behind Forest City, recently reported a mind-blowing $6.7 billion half-year loss and announced that it too had missed some debt repayments to foreign creditors.

This is a social disaster in China. Most new homes in the country are sold pre-construction. Evergrande alone has more than 1.5 million unfinished homes. Across China, desperate buyers are now wondering if their properties will ever be completed.

Much of this chaos can be traced back to the unique way in which the country’s real estate sector developed.

Prior to 1998, residential house sales in China were tightly restricted. Residential property in the country was owned by the government under its socialist economic model, and citizens were allocated housing and enjoyed highly subsidized rent.

But from 1998 onwards, workers were allowed to buy the home they lived in, often at deeply discounted valuations. This newly commercialized property market arrived just as the Chinese economy was emerging onto the world stage. Anyone who bought property during this period ended up making a fortune.

This, in turn, sparked a real estate investment boom.

Property investment became a way for ordinary Chinese to accumulate wealth. More importantly, in a country where trust in banks is low, it also became a way to store wealth.

In 2021, before the recent housing market crash in China, about 70% of all Chinese household wealth was stored in real estate, according to investment firm?Loomis Sayles.

This dynamic created a seemingly insatiable demand for new real estate projects, and major developers like China Evergrande and Country Garden borrowed gargantuan sums of money to feed it. They developed overseas projects too, like Forest City, to give wealthy Chinese a way to move money offshore.

In recent years, however, the economic fundamentals underpinning this model began to break down.

Real estate only works as a way to store wealth if the market is stable or strengthening. One of the factors needed to achieve this is healthy demographics…something China no longer possesses.

Last year, China’s birthrate fell to a new record low, and its population decreased by 850,000 people, the first decline in 50 years. The country is aging rapidly, too. About 14% of China’s population is now over 65,?and in the next two decades, it’s?on track?to add more over-65s to its population than the U.S. has people. These are all warning signs for real estate investors. (Compare this to the demographics in Mexico, where the population is expected to grow by 20% through 2050.)

Then there were the actions of the Chinese government…

China’s leaders grew concerned about the massive indebtedness of the country’s real estate developers and imposed rigorous borrowing limits on them, meaning many couldn’t access new capital to repay their outstanding loans. It also enacted strict currency controls to prevent Chinese investors from moving large sums outside the country.

Combined with the COVID economic crash, these measures plunged China’s property sector into its biggest-ever crisis.

Forest City was caught up in the chaos…

In the years after I visited the site, Forest City never really got going. Given that it relied on Chinese money, the measures by the Chinese government to suppress foreign investing proved particularly disastrous.

To date, only 15% of the initial vision of Forest City has been completed, including just one of the four man-made islands. It currently comprises a few dozen towers and some commercial space, along with a golf course and some other amenities completed on land reclaimed from the jungle.

According to Country Garden, 80% of the finished units have been sold. But hardly anyone lives in the city. Of the 26,000 completed units, only 9,000 are occupied, The Wall Street Journal reported. It’s essentially vacant…

Hundreds of homes in Forest City are now listed for resale or rent. Values have plummeted. One-bedroom condos that once sold for $280 per square foot now go for about $116.

The city is back in the news at present because it’s a target for Country Garden’s foreign creditors, who hope to take control of the project and recoup some of what they’re owed if the company collapses.

Malaysia has not yet given up on the project. It still hopes Forest City can be used to attract foreign investors. In August, Prime Minister?Anwar Ibrahim?said the development would be designated a special low-tax zone where multiple-entry visas are easy to obtain. Perhaps this plan will work…

There could still be an opportunity in owning Forest City real estate at $116 per square foot. Or perhaps valuations sink further from here. It’s hard to say at this juncture, but it’s something for us to watch.

A new city within touching distance of Singapore—home to some of the world’s most eye-watering property values—remains a compelling idea. I’m not ruling out a rebirth for Forest City, and I’ll be following its future closely.

But before I contemplate any investment in Forest City, I’ll need to see proof that it can work as a concept.

As real estate investors, we don’t need to make wild leaps of faith. We can wait for the airport to be built…the train to start running…the tourists to begin arriving…and the new city to start filling up with renters and residents, before we invest our money. There’s still a window of opportunity after the idea becomes real and we can see the proof with our own eyes.

In other words, we can be conservative and risk-adverse and still come out ahead.

P.S. Like I say, I like to buy what I can see...and what I saw in the Dominican Republic earlier this year impressed me greatly...

Back in March, I sent you notes from the road about my scouting in the Dominican Republic. I’d traveled there as part of our Project Prosper II mission to uncover the next RETA places. Now, things are progressing fast on strong potential opportunities there.

A senior member of my team was on the ground recently following up on the scouting I did. He dialed me in to several major meetings with developers. I can tell you this: Developers in the best areas of the Dominican Republic have heard of you. They know RETA. They know what our group buying power can bring. This gives us a huge advantage on getting exclusive RETA-only deals.

I’m confident we’re closing in on something special. But as always, I’ll only bring it to you if it meets all my criteria. The beaches in the Dominican Republic are among the best in the world…as are some of the 5-star resort communities. That’s where we’re closing in on deals…stay tuned.