Apr 30, 2014 06:14 PM

Yangtze River Delta Leads Softening of Housing Market

(Beijing) – China Vanke Co. Ltd, the country's largest property developer, reduced home prices in Hangzhou, eastern Zhejiang Province, in the face of a continued downturn in the housing market. Economists said the latest move could signal another round of price-cuts for residential property.

Other large residential developers, such as Greentown China Holdings Ltd., and Wharf Holdings, also trimmed prices in some projects. Analysts said that while many developers have reported a severe decline in the number of sales, the reduction of prices has raised concern.

Developers only sold 17,631 homes in the first three months of 2014 in Shanghai, down 42.6 percent compared to the last three months in 2013 and down 31.2 percent compared to the same period in 2013.

The deterioration of the housing market this year has been caused by oversupply, in contrast to a slump in 2008, which was impacted by the financial crisis, and a downturn in 2011 led by policy restrictions on the market, according to E&H Corporation, a Shanghai-based consulting company.

Local governments in cities such as Hangzhou, Wenzhou and Taizhou have loosened home-buying restrictions in an attempt to boost the market. In Wuxi, a city in China's eastern Jiangsu Province, the local government is offering home buyers a hukou, or legal household registration.

Bargains Belie Deepening Slowdown

In February, a price war between two residential property projects unleashed a round of price cuts in Hangzhou. Hangzhou-based DoThink Group slashed on average 3,000 yuan per square meter from its North Sea Park home prices, and Beijing-based Tenhong Land followed in cutting its Xiangxieli project's prices by 4,000 yuan on average. Early buyers of the Xiangxieli Project staged protests outside the developer's offices in response to the deep discounts.

A general manager at a Hangzhou property company, who declined to be named, said developers were spurred to cut prices on home buyers taking a wait-and-see approach.

"When the market is at a downturn period, the timing of price cuts is very important. The first to reduce prices will attract buyers, but those that cut prices later may not," said Li Xiaotao, general manager of Hangzhou Xinsheng Real Estate Development Company.

Statistics from China Real Estate Information Corp. (CRIC) showed that homes at North Sea Park and Xiangxieli sold out quickly following the discounts.

Li said large developers are typically the first to reduce prices based on greater pressure to meet sales targets.

Hong Kong-based Wharf Holdings reduced its home prices in Hangzhou, Changzhou and Chengdu. It expected to see a housing sales transaction value of 23 billion yuan in the first quarter of this year, but has only completed 2 billion yuan in the first two months.

"Sales in January and February were behind our expectations. However, when we reduced home prices in some cities, the total sales in the first three months exceeded our expectations," said Zhou Anqiao, a sales representative at Wharf Holdings.

Spreading from the Yangtze River Delta

Developers first reduced home prices in Hangzhou on high vacancy rates. By the end of March, Hangzhou government data showed that 76,004 homes were on sale, an increase of 36.2 percent compared to the same period last year.

According to CRIC, the Hangzhou residential market would require around 24 months to be absorbed by buyers at the current rate of 5,800 homes sold per month.

Meanwhile, the cities of Changzhou and Ningbo also face a housing glut. The CRIC said the cities of Ningbo, Changzhou and Qingdao will require 18 months to have a housing oversupply lifted from the market.

Separately, land purchases made in recent years have hit the balance sheets of property developers and placed additional pressure for price cuts.

CRIC data showed that developers saw an average debt ratio at 63.86 percent in 2013, up 1.17 percent comparing with 2012.

When the central government tightened the money supply to the market, developers turned to trust companies and funds where they took high interest loans, said Yan Hongxing, a manager of Yuyin Fund. Loan repayment has brought more pressure to the capital chain of developers, said Yan. The State Council recently issued regulations to prevent developers from obtaining loans through trust companies and funds.

Investment is expected to flow away from the languishing housing market, said Yan.

"A major source of capital for Hangzhou's housing market is investment from trade and manufacturing companies which borrowed money from banks. These companies have been met with many difficulties recently," said Zhu Lidong, deputy general manager of Hangzhou Binjiang Real Estate Group Co., Ltd.

Zhu said mining companies and clothing manufacturers entered the property development business but lacked competitiveness in design and marketing. When the strength of their core businesses weakened, they retreated.

In Hangzhou, garment manufacturer Youngor Group and ceramic tile producer Hangzhou Nabel Group Co., Ltd. withdrew from the housing market by returning land, selling shares and making drastic price cuts.

Still Headed for a Fall

"Large developers will attempt to achieve their sales targets through price cuts. Cities and regions with an oversupply situation will see large slashes in home prices," said Zhang Hongwei, a director of real estate consulting company Tospur.

Developers have resorted to more aggressive marketing tactics amid a dismal sales situation. In Hangzhou, Sunac China Holdings Ltd. was the first among several developers to require sales teams to advertise on the street.

The grim trend in housing is leading to fewer land purchases and a curtailing of project launches, said Wei Junjie, brand manager at E&H Corp. Second-tier developers may be inclined to purchase land during the adjustment period to gain market share, which allow for a slower cooling of the market.

"The downturn in the market could reshape the positions of developers in the market. M&A activity will happen and offer more opportunities for large developers," Wei said.

A major source of local government revenue, the real estate industry will see further policy adjustments by authorities to encourage buyers into the market.

Data released by the Hangzhou Development and Reform Commission at a meeting on April 21 showed that the real estate industry contributed 29.7 percent of local tax income in the first quarter of this year.

(Rewritten by Guo Kai)

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