Getting panned

As sales slow, property developers’ finances are looking shaky

Getting panned

What a pane: an unfinished apartment block, lacking windows

When news broke of the death of Steve Jobs, SOHO China’s chairman Pan Shiyi wrote on his weibo that Apple should consider selling its iPhones and iPads for under Rmb1,000 to commemorate Jobs’ life.

The post was quickly reposted by netizens, but with a twist for the property tycoon.

“When you pass away, your company should also release apartments that cost only Rmb1,000 a square metre. Over one billion Chinese people would commemorate you too.”

Though China’s housing prices are not likely drop to Rmb1,000 a square metre anytime soon – the average home price in September was Rmb8,877 per square metre ($1,392) – there are signs that Beijing’s measures to bring down bubbly prices are finally working.

A nationwide index of property prices published by Soufun, a leading real estate website, edged down 0.03% in September, the first fall in a year. Tianjin-based property developer Sunac reckons prices could even fall 10-15% next year, reports the South China Morning Post.

No surprise then that property developers are complaining that new home sales have slowed to a crawl.

The squeeze spells bad news for a lot of developers. In issue 124, we reported that China’s banking regulator was already looking into the financing that developers have been obtaining through trust companies as part of a broader evaluation of systematic risk. And now it seems that the trust companies too have concerns about developer cashflow.

“These days we have been keeping a close eye on property trust loans,” one manager at a trust company told CBN. “We review the developers’ cash situation and sales projections every month and sometimes every two weeks to assess the risk.”

Developers turned to trust companies for financing after access to bank lending narrowed, and many of the opportunities for domestic stock and bond issuance began to dry up. Even for the larger developers like Vanke and China Overseas Land, accessing credit is tough.

Vincent Lo, chairman of Shui On Land, the developer of Shanghai’s Xintiandi project, told Bloomberg that a Chinese bank recently withdrew one loan that it had earlier approved for the company citing “policy change”. Such cancellations are “happening quite frequently” to other real estate developers, he added.

With limited options, developers then turned to trust companies (for a guide to their activities, see WiC98). Trusts don’t take on the risk of an investment themselves, but funnel funds from other companies and wealthy individuals into a wide range of investments including private-equity, loans and (in this case) direct stakes in property development.

Trust financing in the property sector almost doubled in the second quarter from the first three months of this year to Rmb136.7 billion ($21.4 billion), says the China Trustee Association, eclipsing the Rmb42 billion lent by banks, which was down by about 75% from the quarter before.

“Nobody expected the kind of growth in trust companies to the scale that we saw in the past three years,” says Patrick Chovanec, a finance professor at Tsinghua University in Beijing. “In a way, the regulators are now playing catch-up on the industry.”

Analysts say one of the reasons Beijing is cracking down on trust lending is to push cash-strapped developers to lower the prices on their inventories. Bosses have tried to resist, betting that the cooling policies will not last and that the government will ease restrictions. That’s what happened in the last tightening cycle in 2008.

This time around, the squeeze is being sustained. Falls in transaction volumes – especially for new home sales – are hurting developers, forcing them to cut prices in order to generate the cashflow to stay afloat.

“There are some developers who are facing funding pressure or have even been cut off. This is something we are happy to see,” one official told the Financial Times.

As Chovanec points out, this is also why prices for primary housing (where developers are selling to homeowners) seem to be falling more than those in secondary markets (where homeowners are selling to other homeowners).

Developers are having to sell to raise capital. But existing homeowners, many of whom have paid cash for their homes, don’t face the same pressures. Hence there aren’t the same price drops for secondary housing.

Under the cosh, some of the developers are responding rather strangely.

That includes Ren Zhiqiang, chairman of Huayuan Property, who has been trying to rebut the widely-held perception that property prices are too high.

To illustrate his point Ren told his 5.2 million weibo followers that the price per square metre of real estate is actually less than that of a high-end bra (Ren says an expensive one costs Rmb600 for 0.02 square metres, which is Rmb30,000 per square foot – adding up to far more than an average property).

To compound his point, Ren added gravely that a bra “can’t shelter you from the wind and rain either”.

There are other indications that the cash-crunch has seen a slowdown in new construction. This has knock-on effects, particularly for the commodities that go into building tower blocks. Sina Finance, for example, reports that the price paid for iron ore has declined for four consecutive weeks, a trend not seen since the financial crisis. China News Week reports that this is a consequence of a fall in demand for steel, which is reflected in dropping prices for that metal too. The magazine reports some mills are dropping their own prices three or four times within a week. “Steel prices are under great downward pressure,” it notes. “The Shanghai construction steel market has fallen sharply.”

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