Year-on-year residential sales statistics issued by mainland authorities would appear to indicate continued modest growth in average residential values across the country.
Quite where and how such an average has been derived is not entirely clear and one has to assume that the figures are largely historic given that in most key markets the cumulative impact of government intervention over the past two years or so has led to significant corrections in the past six, if not 12, months.
The reality is that the residential sector is under severe stress and this is being reflected in both falls in sales volume and reductions in price. While in many cases the various measures introduced by government might not be seen to have had much impact, collectively they are beginning to bite and developers are having to review both their delivery programmes and their sales initiatives.
In particular, developers are facing challenges with funding of their projects, never mind with topping up their land banks. It is also difficult, if not impossible, to secure new funding (even for construction purposes) as existing credit lines are being repriced with a significant mark-up, trimmed or, worse, called in entirely.
Market confidence has also been eroded by the fact that the net asset value of many listed companies has fallen by as much as 50 to 60 per cent over the past 12 months or so.
Price corrections vary from city to city with falls of between 20 per cent to 25 per cent in Shenzhen and Guangzhou and about 15 per cent in Shanghai while Beijing has shown some resilience linked to the Olympics but is not immune to the overall pattern. Second-tier cities have been less affected with more of a plateauing in values although those in southern China are showing signs of adjustment.
From a developer’s perspective, I do not see this as the end of the story as the reality is that given the scarcity of bank credit, funding of continuing construction and, in some cases, even the meeting of existing pre-sales commitments, will have to be achieved though project sales.
This is at a time when developers are reporting half-year results and the fact that many have only achieved about 30 per cent of sales volumes projected for the year.
Developers claim that they sell more units in the second half, which is true in some cases, but to achieve the balance of projected sales plus increased volume to fund continuing operations is going to be extremely testing and likely to worsen the price corrections. In some cases we are talking about increasing sales 30 to 40 per cent over previous years and if developers are to achieve a modicum of success they will need to price very aggressively and to accept the shift from a margin to a volume game.
I believe we will see further corrections over the next 12 to 18 months which are equal to those already recorded in the key cities and by as much as 20 per cent in the secondary cities which have been largely untouched to date.
At that stage, my sense is that on a city by city basis, the government will ease some of the restrictions, particularly construction credit and individual mortgage finance.
From a buyer’s perspective, all this is good news and I have few concerns about latent demand with less than 20 per cent of the population in most cities living in accommodation built within the past 15 to 20 years but many possessing at least enough equity to fund the deposit to upgrade to a modern unit.
There is talk of Beijing encouraging the development of a real estate investment trust market and thus enabling developers to raise funds but this would only help those with quality commercial or mixed use investment properties, not the specialist residential developer who builds to sell.
Another interesting development is the recent announcement that domestic insurance firms are to be allowed to invest yuan-generated premiums in the property sector and this could also provide a useful additional source of liquidity but their focus is likely to be on commercial, income-generating property, not the residential sector.
Top-tier developers may attempt to seek funding through bonds as we have seen over the past few weeks but this is an option that is only available to a select few and the driver for most can only be project sales and the cash flow so generated. We will see rationalisation of the market as many of the small and medium-sized developers struggle with project delivery, not only from a funding but also professional resourcing perspective and a number of alliances, with large developers providing support to smaller industry players, have already been made.
At an operational or working level, in the interests of expediency, we are also seeing the introduction of some “tailored” solutions, largely by overseas funds. One of the most favoured is where developers are willing to forward sell blocks of units for delivery in 12 to 18 months at a significant discount to reflect the bulk nature of the transaction and the risks associated with future delivery.
Another approach is the provision of mezzanine finance with the right to convert to equity (or units) in the event of failure to meet the terms of the loan. While neither of these is a satisfactory permanent solution, both produce cash today.
While I am always reluctant to see government intervention in the sector and would prefer to see market forces at play, it would seem that in this case the government has managed to achieve its objectives of a controlled price correction to ensure a wider degree of affordability in the mass residential market.
However, the challenge will be in managing the continued correction without pushing the development community too far while persuading potential buyers towards the end of the period that the downward adjustments have reached a level which the government considers to be appropriate and sustainable.
It will be interesting to see the change in tone of statements from Beijing as we reach what it regards as being an acceptable level of equilibrium.
Nicholas Brooke is chairman of Professional Property Services Group
Testing times for developers
ReplyDeleteNicholas Brooke
Sep 10, 2008
Year-on-year residential sales statistics issued by mainland authorities would appear to indicate continued modest growth in average residential values across the country.
Quite where and how such an average has been derived is not entirely clear and one has to assume that the figures are largely historic given that in most key markets the cumulative impact of government intervention over the past two years or so has led to significant corrections in the past six, if not 12, months.
The reality is that the residential sector is under severe stress and this is being reflected in both falls in sales volume and reductions in price. While in many cases the various measures introduced by government might not be seen to have had much impact, collectively they are beginning to bite and developers are having to review both their delivery programmes and their sales initiatives.
In particular, developers are facing challenges with funding of their projects, never mind with topping up their land banks. It is also difficult, if not impossible, to secure new funding (even for construction purposes) as existing credit lines are being repriced with a significant mark-up, trimmed or, worse, called in entirely.
Market confidence has also been eroded by the fact that the net asset value of many listed companies has fallen by as much as 50 to 60 per cent over the past 12 months or so.
Price corrections vary from city to city with falls of between 20 per cent to 25 per cent in Shenzhen and Guangzhou and about 15 per cent in Shanghai while Beijing has shown some resilience linked to the Olympics but is not immune to the overall pattern. Second-tier cities have been less affected with more of a plateauing in values although those in southern China are showing signs of adjustment.
From a developer’s perspective, I do not see this as the end of the story as the reality is that given the scarcity of bank credit, funding of continuing construction and, in some cases, even the meeting of existing pre-sales commitments, will have to be achieved though project sales.
This is at a time when developers are reporting half-year results and the fact that many have only achieved about 30 per cent of sales volumes projected for the year.
Developers claim that they sell more units in the second half, which is true in some cases, but to achieve the balance of projected sales plus increased volume to fund continuing operations is going to be extremely testing and likely to worsen the price corrections. In some cases we are talking about increasing sales 30 to 40 per cent over previous years and if developers are to achieve a modicum of success they will need to price very aggressively and to accept the shift from a margin to a volume game.
I believe we will see further corrections over the next 12 to 18 months which are equal to those already recorded in the key cities and by as much as 20 per cent in the secondary cities which have been largely untouched to date.
At that stage, my sense is that on a city by city basis, the government will ease some of the restrictions, particularly construction credit and individual mortgage finance.
From a buyer’s perspective, all this is good news and I have few concerns about latent demand with less than 20 per cent of the population in most cities living in accommodation built within the past 15 to 20 years but many possessing at least enough equity to fund the deposit to upgrade to a modern unit.
There is talk of Beijing encouraging the development of a real estate investment trust market and thus enabling developers to raise funds but this would only help those with quality commercial or mixed use investment properties, not the specialist residential developer who builds to sell.
Another interesting development is the recent announcement that domestic insurance firms are to be allowed to invest yuan-generated premiums in the property sector and this could also provide a useful additional source of liquidity but their focus is likely to be on commercial, income-generating property, not the residential sector.
Top-tier developers may attempt to seek funding through bonds as we have seen over the past few weeks but this is an option that is only available to a select few and the driver for most can only be project sales and the cash flow so generated. We will see rationalisation of the market as many of the small and medium-sized developers struggle with project delivery, not only from a funding but also professional resourcing perspective and a number of alliances, with large developers providing support to smaller industry players, have already been made.
At an operational or working level, in the interests of expediency, we are also seeing the introduction of some “tailored” solutions, largely by overseas funds. One of the most favoured is where developers are willing to forward sell blocks of units for delivery in 12 to 18 months at a significant discount to reflect the bulk nature of the transaction and the risks associated with future delivery.
Another approach is the provision of mezzanine finance with the right to convert to equity (or units) in the event of failure to meet the terms of the loan. While neither of these is a satisfactory permanent solution, both produce cash today.
While I am always reluctant to see government intervention in the sector and would prefer to see market forces at play, it would seem that in this case the government has managed to achieve its objectives of a controlled price correction to ensure a wider degree of affordability in the mass residential market.
However, the challenge will be in managing the continued correction without pushing the development community too far while persuading potential buyers towards the end of the period that the downward adjustments have reached a level which the government considers to be appropriate and sustainable.
It will be interesting to see the change in tone of statements from Beijing as we reach what it regards as being an acceptable level of equilibrium.
Nicholas Brooke is chairman of Professional Property Services Group