Caixin
Feb 25, 2014 05:40 PM

Steep Discounts Prompt Fears Property Market Faces Dark Days


(Beijing) – Analysts have been abuzz over recent signs that some say bode ill for the property market, especially in small cities.

Units in at least two residential complexes in Hangzhou, the capital of the eastern province of Zhejiang, have been put on sale at steep discounts. Haitong Securities says the discounts were up to 20 percent.

Homebuyers who bought units before the promotion swamped sales offices over the weekend, demanding the developers refund the difference.

Ads at one of the communities, called Beihai Park, show the homes on sale for an average price of 15,800 yuan per square meter, compared with 19,000 yuan per square meter before the promotion. That means a 100 square meter apartment cost nearly one third of a million yuan more before the sale.

Several other developments in the city reportedly have also started promoting sales through discounts.

In Changzhou, 200 kilometers to the north of Hangzhou, one complex whose units went on sale on February 21 is available for 7,000 yuan per square meter, down 40 percent from the average price in its neighborhood.

Opinions diverge over whether other developers will follow suit and trigger a collapse in home prices.

Weng Leizheng, an executive at the Hangzhou office of Shenzhen-listed real estate agency Worldunion Properties, said the worst is yet to come, considering the oversupply in Hangzhou.

Housing units on land acquired in the 18 months from July 2012 can readily meet all demand in the city from the second half of 2013 to mid-2015, he said.

"The current adjustment to home prices in Hangzhou is just the beginning," he said. "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 percent."

But large listed developers, including China Vanke, Evergrande Real Estate Group and Longfor Properties, said they had no plans to sell units in Hangzhou for a bargain. One manager at Longfor said the property markets in Hangzhou and Changzhou were indeed oversupplied, but most other cities in the Yangtze River Delta were in a better shape.

In Hangzhou, it would take 17 months to sell homes already built, whereas in Shanghai and Beijing, the figures are at a more reasonable 12 months, an executive of a developer in Shanghai said.

Weng said the two Hangzhou developers were under pressure to repay loans from costly trust products and investment funds. The urgent need to recoup capital to keep up with repayments was the main reason behind their price cuts, he said.

Mixed Messages

The liquidity problem probably also challenges many other developers who spent too much acquiring land, said Zhang Hongwei, a research director at consultancy Tospur Real Estate Consulting Co. This and a slowdown in property sales has worsened the bite, he said.

Although official data shows that 69 of 70 cities across the country (eastern Wenzhou was the exception) saw home prices continue to increase year on year in January, private research has exposed cause for concern in cities lower than provincial capitals.

In January, the transaction volume of new homes in 25 small cities was the lowest in six months, Centaline Property, a real estate agency, said. In addition, 37 out of the 100 cities monitored by China Index Academy, another agency, saw home prices fall month-to-month in January, up from December's 32. Of that, 34 were small cities.

The market was also unnerved by a message sent by Industrial Bank, which said on February 22 it had tightened lending to developers and their suppliers.

Before the Spring Festival, the bank said it had required all branches to stop lending to developers through mezzanine financing, where a loan is routed through intermediaries such as a trust company and used to buy equities in the borrower under a repurchase agreement.

It has also told all branches to stop lending to property developers' supplying companies, such as the manufacturers of steel and cement, the bank said.

The suspension would last until the end of March, the bank said. It did not say what lending rules might follow.

Property shares fell upon the announcement, though analysts said investors should not overreact. They say the bank did not cut off loans entirely to all real estate companies, as the type of lending it suspended was often used by only developers that have trouble getting loans the regular channel.

'Regional Problem'

Those developers often do not meet the standards to borrow directly from a bank. Instead, they raised money by selling equity to investors, usually banks' wealth management clients, with a promise to buy back the shares after a period of time, said Guang Qingyou, Minsheng Securities' analyst.

Relying on the arrangement, many small developers were able to buy land even though they did not have enough capital, Su Xuejing, China Securities' analyst, said. Those developers would be hit hard, he said.

In general, analysts think the risk in the property market has been largely restricted to certain regions and is unlikely to escalate into a national concern.

Chances are low that property prices would fall off a cliff because demand from first-time home buyers would increase as soon as the price falls a bit, Liao Shuang, China Merchants Securities' analyst, said. She expected home prices in big cities to decrease by up to 5 percent this year and those in small cities to remain flat.

Haitong Securities also says the property sector as a whole is not facing an immediate threat of a price collapse, adding, however, some cities may need to deal with the pain of deflating bubbles.

If developers expect prices to fall and liquidity to tighten, "there will be more and more cities like Hangzhou and Changzhou," China Securities said in a report.

You've accessed an article available only to subscribers
VIEW OPTIONS
Share this article
Open WeChat and scan the QR code