The Hangzhou hypothesis

Bearish sentiment weighs on the real estate sector


Song Weiping: Greentown’s founder has reduced his stake

“If Hangzhou’s housing market is in the doldrums, you should forget about the whole China property market,” warned Song Weiping, chairman of Greentown, the largest property developer in Zhejiang province.

Song’s point is that Hangzhou is one of the most affluent cities in Zhejiang. It has often been ranked as one of China’s top five most desirable places to live. Alibaba Group, the country’s largest e-commerce group, is even headquartered there. So if its property market is in trouble, it’s an ominous signal for the country as a whole.

Song meanwhile is reducing his own exposure. He announced that he will be selling 24% of the Greentown stake that he shares with his wife Xia Yibo and chief executive Shou Bainian to Sunac, another property firm (currently, the couple and Shou hold a combined 43% of Greentown). The $813 million deal will make Sunac the joint largest investor in Greentown (Wharf, the Hong Kong-listed conglomerate owns 24%).

The deal is interesting for several reasons. For a start, mergers between Chinese property developers are rare. More unusual still is that Song is selling to a smaller rival – Greentown’s market capitalisation is $2.14 billion versus Sunac’s $1.63 billion.

For some, this implies that Hong Kong-listed Greentown is in trouble – and much more so than Song is letting on.

If Song’s earlier prediction about homes in Hangzhou is anything to go by, perhaps it’s a good time to sell Greentown stock. Plagued by slumping sales, home prices in Hangzhou dropped 0.7% from the previous month. “Not long ago, some looked at Hangzhou as a top-tier property market. Now, oversupply is apparent even there,” a property analyst told the Financial Times.

Hangzhou isn’t the only city in the property doldrums.

Home sales have slowed to a crawl across many other parts of the country. Prices last month climbed in 44 of the 70 cities tracked by the government’s statisticians compared with 56 in March. That was the fewest metropolitan areas with price gains since October 2012 when increases were recorded in 35 cities on a monthly basis.

Bulls say China has weathered this type of crisis before. The housing market took a tumble in 2008 and 2011, only to rebound with considerable vigour. But on both those occasions the slowdowns were primarily because the government deployed a series of tightening measures to rein in runaway prices. This time, market forces look to be more of a driving factor.

The problem for many cities? Oversupply. As WiC has pointed out in previous issues, there is excess supply in many locations around the country. Reports suggest that the overhang of unsold homes in second-tier cities has risen to about 15 months of sales. In tier-three and tier-four cities, it is about two years.

Take Tangshan, a third-tier city in Hebei province (where the local economy has been struggling, see Talking Point). According to the Economic Observer, developers have added 17.4 million square metres of floor space over the last four years. But they’ve sold an average of just 146,000 square metres of floor space in each of those years. So the overhang is going to take at least a decade to clear at the current pace of sales – and that assumes that developers stop adding to the stockpile.

In off-the-record remarks that found their way into the national press this month, Vanke Group’s vice-chairman Mao Daqing revealed that it would take his firm more than 100 months to clear its unsold inventory in Tangshan.

Weifang, another third-tier city but this time in Shandong province, has also been suffering from oversupply. Local residents say that many of the newest apartment buildings are empty and unsold. On a visit to Weifang recently, WiC saw a number of half-finished sites where work seemed to have been abandoned. At least one property developer had skipped town, taking homebuyers’ money with him.

“China’s property market is on a very dangerous brink,” Xu Gao, the Beijing-based chief economist at Everbright Securities, told Bloomberg this week. “Concerns about the slowing market led to weakening prices and sales, which has turned into a vicious circle.”

Some developers have started slashing prices in the hope of generating more sales. One developer in Beijing grabbed headlines by offering buyers zero-downpayment housing loans. Two other projects in the Beijing area agreed to 50% discounts. Plenty of other developers are willing to cut prices to accelerate destocking, says Hong Kong Economic Times.

Other housebuilders are rushing to shore up their capital. Country Garden has agreed to sell $250 million of five-year bonds directly to the family office of Hong Kong tycoon Lee Shau-kee, chief executive of Henderson Land, says Apple Daily. The privately-placed debt will pay a yield of 7.5%.

Smaller property developers face more of a struggle with finance. Xinhua reported this week that one firm – Guangzhou’s Guangyao Properties – looks set to go bankrupt and has had its assets seized by the local government.

Another property developer in Hunan is reportedly pleading for a bailout from its local government.

Less wonder, then, that Moody’s downgraded its view on the sector from stable to negative in the middle of this week. The ratings agency predicts that many developers will face major declines in sales growth.

Policymakers are starting to throw out a few lifelines in the most beleaguered cities. In Hangzhou local media reports that the municipal government wants to reduce the cash flow pressure on developers by capping the upfront payments required to buy new land. Smaller cities like Tongling in Anhui, Ningbo in Zhejiang and Nanning in Guangxi have all started to loosen home purchase rules.

Greentown’s Song may be reducing his personal exposure to the sector but he still had a few words of wisdom for his peers.

“No matter how challenging the situation may be, we believe there is no reason or likelihood for human civilisation to regress from a macro-historic perspective. For a country at a certain point of time, the market environment can be harsh and uncertain due to all sorts of difficulties. However, who can usher in sunny days without dedication and hard work?” he wrote on his personal weibo.

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