Real Estate Market Braces for Winter
“We are well and truly at the turning point,” Chairman Yu Liang told the staff of Hong Kong-listed property group, China Vanke Co. Ltd., back in September. He didn't mince his words. “Everything we do from now on must be focused on making sure that Vanke survives.”
As one of the titans of China's real estate industry, Yu's words sent a chill through the market. “If Vanke isn't strong enough to survive, what hope is there for other property developers,” a senior executive at a real estate company, who declined to be identified, told Caixin. But his comments merely confirmed what is already common knowledge in the industry: a cold winter has arrived.
September and October are traditionally a golden time for residential property sales in China as the Mid-Autumn festival and the week-long National Day holiday bring buyers out in their masses. But this year has been different, even for the country's biggest developers including Vanke, Country Garden Holdings Co. Ltd. and Evergrande Group.
Customers are scarce and prices are falling. During the weeklong public holiday at the start of October, sales in 31 cities fell 27% from a year earlier, according to Shanghai-based property consultant CRIC. That was on top of a slump of 63% in 33 cities in 2017.
"This time last year, I had around 10 customers a day, this year I've only had three to five,” a sales person at a real estate project in Guangzhou told Caixin.
Country Garden, the largest developer in terms of sales, has changed its strategy at its Xinzhou Mansion development in Shangrao, a city some 500 kilometers (310 miles) southwest of Shanghai. Three months ago it was selling decorated apartments for 10,000 yuan ($1,443) a square meter, now it's selling them undecorated for 7,000 yuan,
That's angered buyers who paid the full price and they descended on the sales office to protest during the National Day holiday, but Country Garden has stood firm, calling the drop a response to changes in market conditions.
“We've arrived at the inflection point and the market outlook has really turned,” a manager at a leading real estate developer told Caixin. “Around the country, about a third of new properties on the market have already seen some kind of price reduction.''
From a policy perspective, the harbinger of winter returned in July when the Communist Party's Politburo issued an order to “resolutely curb the increase in home prices.” The Ministry of Housing and Urban-Rural Development followed in August with a warning that local governments would be held accountable for failing to meet price control targets.
Although the campaign to control surging property prices began in September 2016, the mantra then was “to control excessive growth in housing prices.” The change in wording in July's order was a clear signal to the market that any increase would be intolerable, an industry executive told Caixin.
The impact of falling sales on developers' cash flow has compounded the difficulties they were already facing as a result of a long-running crackdown on financing. Builders rely heavily on cash buyers, down payments from prospective buyers, often made before developments are completed, and transfers from mortgage providers. But the government's campaign has gradually made it more difficult for buyers to hand over down payments and get mortgages, and for developers to sell. With demand cooling they've been forced to lower prices.
Although many developers were not willing to cut prices, a decision by Evergrande Group to launch a nationwide sales promotion was a game-changer. On Aug. 30 it announced discounts of 8.9% on 646 developments in 280 cities across the country. The floodgates opened and scores of other developers followed, including Hong Kong-listed China Overseas Land & Investment Ltd., and Times China Holdings Ltd., and Shenzhen-listed Vanke.
“Sales promotions offering discounts have become the norm in the industry and we are likely to see discounts of more than 10%,” CRIC said in a report in September. The company's research showed that only half of the top 20 real estate enterprises completed more than 50% of their annual sales targets in the first half of the year, suggesting some companies are under pressure and may be forced to increase price cuts.
According to research by TF Securities, the country's top real estate developers combined only achieved 53% of their revenue targets in the first quarter of 2018, down from 66% in 2017, while Vanke hit just 52%, down from 70% last year.
With sales growth slowing, investors and developers are increasingly turning their attention to debt. In the two years to June 2018, the debts of the top 10 developers in China jumped to 97.7% of their assets from 68.9%, according analysts at Great Wall Securities. For the industry as a whole, the ratio has surged to 104% from 80.9%.
More than half of the 128 developers listed on the mainland's stock exchanges had negative operating cash flow, according to Wind Information data. Among the top property companies, Hong Kong-listed Country Garden and Evergrande Group, are in most danger, with high debts, high capital turnover rates, and a high proportion of projects in third- and fourth-tier cities.
The presidents of both companies announced at their half-year earnings briefings in August that they will keeping focusing on bringing down debt. Evergrande Group is particularly exposed, with a debt-to-asset ratio of 127% at the end of June, although it has already exceeded its target of reducing the ratio to 140% this year.
Although Vanke's survival strategy has signaled the arrival of winter for China's real estate market, some in the industry are hoping that the recent cut in banks' reserve requirement ratio (RRR), the fourth this year, will give the industry a reprieve.
The People’s Bank of China (PBOC) announced on Oct. 7 that it would lower the RRR for most commercial banks and all foreign banks, releasing a net 750 billion yuan into the financial system. Although the central bank said the additional liquidity was aimed at boosting credit to small firms, private companies and innovative businesses, developers are hoping banks will use the money to issue more mortgages to home buyers.
According to analysts at Guosheng Securities, every round of RRR reductions since 2011 has been accompanied by a rebound or a sharp rise in housing prices. However, this time could be different.
The previous rounds of RRR cuts occurred during periods when government policy toward the real estate industry was relatively relaxed and encouraging, whereas the current cycle is taking place during a time of significant regulation and tightening. That means the impact of the additional liquidity released by the PBOC on the property market is likely to be limited, according to bankers and industry analysts.
“The government wants to de-leverage and curb housing prices, so it’s going to be difficult for money to flow into the property market,” said Xiao Wenxiao from CRIC.
Contact reporter Liu Jiefei (firstname.lastname@example.org)
May 25 18:53
May 25 00:48
May 24 22:24
May 24 18:31
May 24 16:37
May 24 16:03
May 24 15:54
May 24 14:18
May 24 13:52
May 24 11:43
May 24 02:36
May 24 02:29
May 24 02:51
May 23 19:33
May 23 18:53
- 1Chinese DNA Sequencing Firm BGI Faces Legal Battle with Illumina
- 2Former Chief Securities Regulator Put Under Investigation
- 3Exclusive: Saudi Oil Colossus Wants to Shift Its China Business Downstream
- 4New Credit Bureau Finds Good Data Is Hard to Come By
- 5Central Bank Reveals First Step to Unifying Benchmark, Market Rates
- 1Power To The People: Pintec Serves A Booming Consumer Class
- 2Largest hotel group in Europe accepts UnionPay
- 3UnionPay mobile QuickPass debuts in Hong Kong
- 4UnionPay International launches premium catering privilege U Dining Collection
- 5UnionPay International’s U Plan has covered over 1600 stores overseas