This month, China’s leading real estate developers will bring to market a fresh supply of new housing. In previous years, this would find home buyers out in force, snapping up properties no matter what the price. But this year it will come as a severe test as the housing market continues to decline and sales of new homes have become extremely difficult.
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China’s Real Estate Developers Waiting on Dangerous Times
8 September 2008
This month, China’s leading real estate developers will bring to market a fresh supply of new housing. In previous years, this would find home buyers out in force, snapping up properties no matter what the price. But this year it will come as a severe test as the housing market continues to decline and sales of new homes have become extremely difficult.
China’s real estate developers have long focused on acquiring land, and then sitting on it and waiting for prices to rise. The Chinese government last year tightened the land policy, requiring developers to launch any development project within two years of acquisition or face government recovery of the land. Many developers have been forced to accelerate housing construction and a lot of housing is now at the period of delivery.
Vanke, China’s leading real estate company, launched a promotional scheme a few months ago to complete this year’s sales target of 80 billion yuan. But present sales stand at less than 30 billion yuan and Vanke needs to finish sales of 50 billion yuan in the next three months. Current monthly turnover, however, run to only 5 billion yuan.
In order to realize cash flow and achieve this year’s sales target, Vanke is reducing prices in many cities, a move that has led immediately to dissatisfaction from purchasers who bought homes at high prices. In Shanghai, people have even taken to the streets in protest, demanding compensation from Vanke.
A recent report shows that new home turnover in July in Shanghai fell 24 percent, the largest decline of housing prices in Shanghai since July 2005, also the largest decline since the new round of regulation and control.
The Yangtze River Delta region, China’s most economically developed area, has seen a substantial decline in housing transactions. In July, turnover in Shanghai fell by 68% and in Nanjing by 47%. Hangzhou’s and Nanchang’s markets both lost 58%.
The sullen situation of China’s real estate market has continued for close to a year, mainly over the expectation that tight macro-control will further suppress the market. At the end of July, the central bank and China Banking Regulatory Commission jointly issued a call for all financial institutions to strengthen management of commercial real estate credit, a further contraction of mortgage funds.
If this continues, it may well lead to chain crisis. China’s real estate loans are the lion’s share of commercial banks loans. Any serious problem there would endanger the profits of commercial banks. The government is not likely to allow such a thing to happen.
But real estate has not reached its most dangerous moment. China’s regulation and control departments are hovering between controlling inflation and maintaining economic growth. The real estate market, which has as yet had no large-scale of default or collapse, has not attracted enough attention.
The peril is due not this year, but next. Once a slew of developers can’t recover this year’s funds, running their businesses will become extremely difficult and will inevitably entangle the banks. By then, perhaps the most painful role will no longer belong to the developers but to the bankers, who at present are swimming in such nice profit streams.
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