Jun 26, 2017 04:02 PM

Property Games Leave Homebuyers out in Cold

(Beijing) — Hunting for an apartment since his marriage in October, Wang Zeng has become increasingly frustrated by the policies of the Guangzhou government in its battle to curb soaring property prices. Its latest tactic — cutting the number of permits granted to developers to sell new homes before all the official certificates have been obtained.

“It’s getting more and more difficult to buy an apartment,” the 30-year-old airport staffer complained as he checked out a project in the city center in early May. “Permits for this project were handed out recently, but only for 50 units. But more than 300 people have registered to buy.”

Analysts and real estate company executives said Guangzhou, the capital of the southern province of Guangdong, is one of many cities that have tightened the issuance of what’s known in the industry as presale permits in an attempt to force developers to cut prices. Local governments are struggling to meet a target set by top leaders in October to force a halt in home prices on a month-on-month basis in “hot cities” – regions where prices have been soaring the fastest.

Unwilling to sacrifice their profits for government policy, developers have delayed applying for new presale permits or refiling requests previously rejected. Some have even sold projects awaiting presale permits to real estate companies with deeper pockets, who can afford to sit on the developments while they wait for the policy to loosen.

But this game between local authorities and real estate companies has only served to deepen the slump in the supply of new housing.

“Hot cities”

In the four first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen, the amount of floor space for new homes granted presale permits in May plummeted 53% from April and by 61% year-on-year, CRIC, a Shanghai-based property consulting firm and data provider, said in a report released in early June.

In 10 of the 15 “hot cities” monitored by the National Bureau of Statistics (NBS), the amount of new housing in terms of floor space fell in May from the previous month. In one extreme example, the eastern city of Fuzhou had “zero supply” for two straight months, CRIC said.

“In many hot cities, we need to wait for several months to get the presale permits, and each time what we receive only covers a small number of the units we want to sell,” an executive of a property company, who declined to be named, told Caixin.

The presale permit is an important document for property developers because it allows them to sell homes in projects that may or may not have been completed, but have not obtained all the certificates required to begin selling officially.

It’s also an effective tool for authorities to rein in prices. To get the permit, developers must submit the estimated sale price of each apartment, and once the go-ahead is given, the final sale price must fall within a certain range of the registered one. Local governments have the power to reject applications if they believe prices are too high, and they are now using this as leverage to keep a lid on prices.

In addition, by restricting the issuance of the permits, officials can manipulate the pace of price increases across their cities. They can reject applications for high-end developments or give priority to developments in cheaper suburban areas, which can hold down the city’s average home price and keep the month-on-month increases within an acceptable range.

Bottom line

Some local authorities have been clear about where their bottom line is. For example, the city government of Zhongshan, Guangdong, announced on May 2 that the estimated prices filed in a developer’s application should be the average selling price of other units in the same project over the previous three months. Alternatively, the benchmark should be set at the average selling price of other projects in the neighborhood.

The local authority also said that once the permit is granted, if the sale price exceeds the registered price or drops more than 15% below it, the transaction will be blocked from going through the online contract-signing process — a compulsory procedure to prevent scams such as selling the same property to more than one buyer.

Other cities like Guangzhou have been less transparent, leaving companies to grope in the dark as they attempt to discover what the government will tolerate by changing prices when they resubmit applications. Developers who can’t lower their prices to acceptable levels just stop applying for presale permits.

Data from the Guangzhou online contract signing website showed that in May, projects in downtown areas, which are the most expensive, often were only granted presale permits for just 50 apartments per application. Developments in the suburbs, which are priced below the city average, got the green light for several hundred units each time.

“Fifty units means the government allows you to sell just a few floors, even though construction of the whole building or the entire compound has been completed,” an employee of a property developer who spoke on condition of anonymity told Caixin.

The clampdown on permits has added to the pressure on developers’ cash flows, which has already been squeezed by government restrictions on key financing sources such as bond issuances and private stock placements, as well as the regulatory crackdown on off-balance-sheet lending such as wealth management products, which were big suppliers of funding to the property sector.

The presale permit issue has exacerbated the problem because income from buyers, such as down payments, forms a crucial part of property developers’ funding. Deposits, advance payments and personal mortgage payments account for a combined 46.5% of real estate developers’ total funding, according to data from the NBS.

“Builders need to recoup their investment, so they are keen to offload their developments quickly,” said a former financial manager with a Guangdong-based real estate company who declined to be named.

In a report published in May, brokerage GF Securities said that funds raised by the 66 real estate developers it surveyed slumped by 42% year-on-year in the first four months of 2017 to 311 billion yuan ($45.6 billion). Meanwhile, borrowing costs have increased, with the average interest rate rising to 6.1%, up 0.5 percentage point from the same period in 2016, the report said.

Pent-up demand

Some developers are better positioned to weather the storm, especially large companies that built up cash reserves during the market boom last year. They are reluctant to cut prices to obtain presale permits. Instead, they are postponing new project launches until local authorities relent because they believe there is strong pent-up demand for housing.

“Our problem is not a lack of buyers, it’s that we are not allowed to sell,” an official with a leading domestic developer listed in Hong Kong told Caixin on condition that he not be identified. “We would rather hold off selling [than reduce prices] because prices will keep going up.”

Smaller firms simply cannot afford to cut prices because they paid so much for the land. Others are resisting out of concern for their reputation or because they need to pay back debts.

Land prices in cities like the eastern city of Nanjing hit record highs in 2015 and 2016, costing developers a fortune. Developers will almost certainly lose money if they lower prices on those projects just to get the sales permit, said Zhao Jingbo, an analyst with CRIC.

“We will not go for markdowns until the last minute, because cutting prices tells the market that we are dying,” said an executive of another real estate company.

The former financial manager said small developers need liquidity more urgently than big companies to pay off debt because they have to keep their credit standing in good order to ensure continued access to financing. “Financing is closely linked to credit,” he told Caixin. “For many small and midsized developers, generating liquidity is now more important than profits.”

To generate liquidity, some small and midsized companies are selling part or the entirety of projects that don’t have presale permits to big developers, who regard such deals as a cheaper way to buy real estate.

Since April, 45 property developments have been listed on the Beijing Equity Exchange, compared with eight in the first three months of this year and five over the previous three years.

Government in retreat

The supply crunch triggered by the standoff between developers and local governments has become so severe that authorities in some areas have quietly started to make concessions.

There are signs that the government of the southwestern municipality of Chongqing has loosened requirements on prices submitted in applications for presale permits, and companies have been steadily raising their prices, according to Wang Wei, an analyst with CRIC.

Some local authorities have begun recognizing so-called decoration contracts — arrangements that builders had adopted to skirt limits on sale prices and that were the target of previous regulatory crackdowns.

These contracts are tacked on to the main sales contract that real estate developers sign with homebuyers as part of the property purchase agreement. They allow developers to charge separately for fitting out and decorating the apartment. As these costs are not included in the official sale price recorded on the online contract-signing system, these contracts offer a way of recouping revenue lost from lowering prices to obtain the presale permit and pass other official scrutiny.

In May, Wuhan in central China became the first city to explicitly allow the signing of such agreements, putting in place a multilayer system to regulate charges in decoration contracts for different types of housing. The local government has published guide prices that in effect keep overall charges within 20% of a property’s sale price in the online contract-signing system, with the highest cost capped at 5,000 yuan per square meter.

Other cities such as the southern city of Nanning have followed suit, although the details of the policies differ.

Shut out

This backtracking is a “forced concession” from local governments, a source in the real estate industry told Caixin.

“Price limits cannot control true market prices, so local governments have had to legalize these side contracts, and they don’t affect the price that is registered in the online signing system,” he said.

In the meantime, for Wang Zeng and thousands of aspiring homebuyers like him, owning a property remains out of reach.

“People like me who just got married have to buy a house, but we have been shut out of the market,” Wang said. “Not only have home prices reached a level where they are unaffordable, but now the government has made it worse by cutting off our access to the market.”

Contact reporter Fran Wang (

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