Everything must go

Price-slasher: Bian Huacai

“Man is an animal that makes bargains,” said Adam Smith, the famed Scottish economist. “No other animal does this.”

Evidence of our love of a deal was on display in Wuxi earlier this year, where there were briefly bargains galore in the city’s real estate market. The discounts were best at a project named Wuxi Jiaye International City – part of a new central business district in Wuxi – where the developer dropped its asking price from Rmb16,000 per square metre to Rmb6,900 per square metre, reports Moneyweek.

The bargain price reflected desperation on the part of the real estate firm. Last year the developer behind the deeply discounted project – Wuxi Jiaqi Real Estate Development – took out loans worth Rmb858 million ($137 million), which come due early next year. Slashing prices this summer was the strategy for raising cash fast.

Who were the bargain hunters? “A lot of banking and government people came to buy. We basically relied on word of mouth, so the buyers were mostly local people,” a member of the sales staff told the newspaper, adding that the apartments on offer all sold at the lower price.

The outcome won’t suffice to deal with the developer’s debt problems, however. Moneyweek estimates that the sales have only helped the company to raise about Rmb376 million so far, although other towers in the development have yet to be sold (the first phase of Wuxi Jiaye International City contains 14 buildings). But it is now unclear if the company will be able to offload more apartments to willing buyers at similar bargain prices.

Although government officials themselves may have featured among the buyers for the cut-price apartments, at an official level the local government is reportedly very unhappy with the slash-and-burn sales technique. The concern is that the low prices could create downward pressure for projects across the wider neighbourhood, including developments by real estate heavyweights such as China Vanke.

Another problem: the local authorities had high hopes for the zone in question, having doled out policy and credit support. That makes it embarrassing that apartments in the ‘prestigious’ area sold for just Rmb6,900 per square metre.

“The government hopes the housing prices will sell for more than Rmb10,000 [per square metre] to reflect the status of this area as a financial centre,” a salesperson toldMoneyweek. (Given Wuxi’s proximity to Shanghai, it’s worth mulling why it’s building a financial centre in its own right).

In the meantime, negotiations with the government are said to be deadlocked. “Our boss would like to recover the funds as soon as possible, so he wants to set an affordable price to enhance sales,” another employee reported. “But the government disagrees. That means we cannot set the price too low.”

Pressure is mounting for some kind of agreement between the two sides, as Jiaqi’s parent company, Calxon is also lumbered with debt – the developer raised close to Rmb3 billion worth of loans last year and Rmb1.8 billion of these need to be repaid in the first half of 2013.

Calxon’s difficulties in Wuxi are a reminder of another problem: the exposure of China’s trust industry to property loans. Calxon raised the bulk of its financing through trust loans granted by Shanghai Trust, Minmetals Trust and Kunlun Trust. One fear is that – as more property developers struggle to repay their loans – overstretched trust firms could prove a weak link in the wider financial system (we first touched on this theme in WiC98).

Calxon is already in a highly fragile state, losing Rmb328 million in the first half of 2012. Little wonder that its boss Bian Huacai has been dubbed by Chinese media as the ‘king of the lossmakers’. The company’s share price fell to Rmb3.3 in late August, well below its high of Rmb9.7 last year.

This week the stock made a partial recovery (to Rmb3.7), after Bian announced plans to sell assets to repay loans.

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