Feb 02, 2012 05:04 PM

China's Once-Hot Property Market Turns Polar


Flexible marketing strategies that helped some residential real estate developers beat 2011 sales targets may prove no match for government policymakers who've taken a rigid stance on housing market controls for 2012.

Thus, the credit and home buying controls phased in by the government since 2010 are likely to have more of their desired effects by cooling home prices and discouraging flat-flipping in coming months.

For developers, that means a more challenging business climate.

Indeed, executives from several major developers who spoke with Caixin recently said they sense a long, figurative winter settling in as revenues decline and credit remains tight.

Mergers and takeovers are likely to whittle developer ranks, while slackening demand will slow construction and pinch profit margins for developers that survive. Some developers have trimmed construction plans for 2012, or shifted their focus to affordable housing.

Most executives said they're looking ahead with a mix of pessimism and caution: So far, they see little to cheer in the new year.

"Things will be very difficult in 2012," said Mao Daqing, vice president of China Vanke Co., Ltd., one of China's biggest developers, at a Beijing press conference in December. "It will be a winter and a test for the entire industry."

Financial Chill

Cold winds started blowing in the fourth quarter 2011, as a policy-encouraged credit crunch prompted some banks to stop issuing mortgages to first-time home buyers. Home shoppers in cities such as Nanjing, Chongqing and Wuhan were affected by freezes on mortgage loans announced by Industrial Bank Co. Ltd. and China CITIC Bank.

In an interview with Caixin, Moody's Investors Service Inc. Vice President Zhong Wenquan warned that mainland developers with Hong Kong-listed stock may find financing especially difficult in 2012.

Although some government policymakers have referred to "fine-tuning" real estate market controls in 2012, hinting that regulators may allow looser credit, industry insiders remain skeptical about the overall financial environment.
An executive at one central government-controlled real estate developer who asked not to be named told Caixin he thinks lending "will still be tight in 2012" across the board, even though "state-owned enterprises may have some advantages and may get a few more loans than others."

In addition to successful debt refinancing, flexible marketing techniques such as sales promotions kept cash flowing for most developers through the first three quarters of 2011. But a steep decline in sales started in October and continued into the new year, which has led to a full-blown liquidity crunch for many companies.

Zhong said Moody's is now "most worried about" developers who previously borrowed from overseas investors or whose stocks trade in Hong Kong, and are not allowed by regulators to issue bonds for fear they won't repay the debt.

Some may be unable to repay foreign investors, he said, at a time when "the overseas financing market is very bleak right now, and the overall international economic situation is not optimistic."

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