Last year Vanke’s chairman Wang Shi shocked his investors with what looked like a less than benign assessment of China’s housing market: “It doesn’t look good”.
This month there was a sterner prediction from a rather more loquacious property developer called Ren Zhiqiang. He told local media: “Many developers are very optimistic this year, thinking it is going to be the same as last year [when housing prices went up in most cities]. I would tell them, don’t be too hopeful. It is very dangerous.” (For our profile of the colourful tycoon, see WiC162.)
In two cities, at least, that forecast is starting to look accurate. Last week property developers in Hangzhou and Changzhou began cutting prices in an effort to jumpstart sales of new homes. The strategy has begun to push down valuations at similar developments in neighbouring projects, according to local media.
In Hangzhou, developer DoThink Group cut prices by 12.2% at its North Sea Park project to Rmb15,800 ($2,592) per square metre. It says it wants to clear inventory and raise cash to purchase more land. But homebuyers who bought units before the promotion were less-than-excited about the news, swamping sales offices over the weekend to demand that the developer refund the difference, reports Century Weekly.
Similarly, a new luxury development in Changzhou, a third-tier city in Jiangsu province, has also started to offer steep discounts. Agile Property and Star River Group, which jointly developed a 21-tower project, dropped asking prices to an average of Rmb7,000 per square metre, down from Rmb11,000 in December.
The price is 40% below the average price in the local neighbourhood, according to data from property broker Soufun.
Analysts say that the price cuts are an indication that oversupply is continuing to plague many second- and third-tier cities. Local statistics reveal that Hangzhou is sitting on as many as 119,700 unsold homes, the most since 2007. The scale of this empty inventory significantly exceeds the actual number of property transactions in the city last year.
Worse, demand has also slowed. Securities Times says a retreat by speculators from Wenzhou is partly to blame. “In the past few years, Wenzhou buyers accounted for almost a fifth of Hangzhou’s housing market. However, the crackdown on private lending in Wenzhou greatly reduced their purchasing power, which affected Hangzhou property. As a result, inventory is rising and the only way to churn through it is to reduce prices,” one local property developer told the newspaper.
“The current adjustment to home prices in Hangzhou is just the beginning,” predicts Weng Leizheng, a Hangzhou-based real estate agent. “Price cuts will not be limited to individual developers. They will become common and the first round of adjustment will see prices fall by 15% to 20%.”
Another reason for the cuts is that many developers are under severe pressure to repay loans made to them by trust companies (for our article on the growing difficulties facing such trusts, see WiC226).
Other sources of funds have dried up too with the broader tightening of monetary conditions. Last week mid-sized Industrial Bank declared it had stopped extending loans to property developers and their suppliers.
So to avoid default the most cash-strapped developers have little choice but to sell their inventory at reduced prices. This is exactly the phenomenon being witnessed in Hangzhou and Changzhou.
But are we going to see a landslide of defaults on trust loans across the country? The bigger real estate firms have been raising cash to avoid that fate. Developers in China have collectively issued $7.9 billion worth of bonds so far this year, according to Dealogic, accounting for 38% of global bond issuance in the real estate sector.
But that avenue is also closing rapidly, as investor jitters grow.
Calxon Group, a developer listed in Shenzhen, recently announced that it had cancelled its attempt to issue a Rmb1.3 billion five-year corporate bond because of poor market sentiment.
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