March 27, 2014

Risk No One Seems Willing To Stomach

A report from the South China Morning Post. “Underdeveloped second and third-tier cities became a magnet for some of the mainland’s biggest developers after 2009, when the authorities started imposing austerity measures in a bid to rein in runaway home prices. The developers were betting that lower land prices and the huge growth potential in such cities could generate attractive returns, but the influx of property investment led to chronic oversupply problems. As a result, developers have been forced to cut prices, some by more than a third in Changzhou, Hangzhou, Nanjing, Ningbo and Qinhuangdao.”

“The South China Morning Post recently visited the two cities where the first price cuts were seen this year: Changzhou in Jiangsu province, and Hangzhou in Zhejiang. To speed up sales, an unprecedented price war broke out among developers in the Changzhou - which media reports have likened to a ghost town - but many buyers stayed out because of fears prices could fall further.”

“Agile Property and Star River took the lead by cutting prices at their luxury project, Star River, by as much as 36 per cent from the previous launch in December to about 7,000 yuan (HK$8,720) per square metre for bare-shell units. The price for furnished units fell 27 per cent to 13,000 yuan per square metre. ‘The Changzhou government immediately ordered Agile to stop the price-cut promotion in order to avert a severe price war,’ said Yang Quanqiao, a director for development at Centaline.”

“However, the developers sidestepped the government’s warning, replacing the ‘price cuts’ mentioned in their promotional materials with ‘huge preferential offers’ instead.”

China Economic Review. “A quick glance at the numbers shows exactly why Chinese developer Zhejiang Xingrun Real Estate went belly up last week. But it’s important to understand how it ended up in the mess in the first place. One problem for capital-strapped developers in the Ningbo area is that private lenders no longer want to lend to highly risky companies. In fact, they are calling in their loans. The value of property in some areas of Fenghua is decreasing and that trend has lowered confidence in developers’ ability to pay dizzyingly high interest rates.”

“Banks aren’t hot on lending to this kind of developer either. Local bank managers are reportedly being told that they may lend to risky borrowers if they wish, but they will be held accountable. High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago.”

“Xingrun’s woes are still the woes of the local authorities. The default will add US$305 million (RMB1.9 billion) to Fenghua province’s non-performing loan portfolio, pushing up the rate of toxic assets to 5.27% and making it Zhejiang province’s most indebted government, according to calculations by The Economic Observer newspaper. Add Fenghua’s problems to those of the greater Ningbo region. The area reportedly has at least six years of housing stock either sitting empty or under construction.”

From Reuters. “Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong and some are knocking up to a fifth off the price for a quick sale as a liquidity crunch looms on the mainland. Wealthy Chinese were blamed for pushing up property prices in Hong Kong, where they accounted for 43 per cent of new luxury home purchases in the third quarter of 2012, before a tax hike on foreign buyers was announced.”

“‘Some of the mainland sellers have liquidity issues … Their companies in China have some difficulties, so they sold the houses to get cash,’ said Mr Norton Ng, Account Manager at a Centaline Property office close to the China border, where luxury homes costing up to HK$30 million (S$4.89 million) have been popular with mainland buyers.”

“In a Hong Kong housing development called Valais, about 10 minutes’ drive from the Chinese border, real estate agents said between a quarter and half of the 330 houses are now on sale. At the development’s frenzied debut in 2010, a third of the HK$30 million to HK$66 million units were sold on the first day, with nearly half going to mainland Chinese.”

“This month, a Chinese landlord sold a 1,300 sq ft unit at the Imperial Cullinan — a high-end estate developed in 2012 — for HK$19.3 million, 17 per cent less than the original price. The landlord told agents to sell the flat as soon as possible, said Mr Richard Chan, Branch Manager at Centaline Property in West Kowloon. ‘In the past two weeks, those who were willing to cut prices were mainland Chinese. It is going to have some impact on the local property market — that’s for sure,’ he said.”

The Standard. “A warning that local interest rates may rise more sharply and sooner than expected - posing downward risk in the homes market - was sounded by the Hong Kong Monetary Authority yesterday. The HKMA estimated that mortgage repayment under a 20-year contract could soar by 30.2 percent if loan rates jump 300 basis points. And income gearing ratio would increase to 83 percent from 64.1 percent.”

“Reflecting concerns, a homeowner at Grand Promenade in Sai Wan Ho sold a 947-square- foot flat yesterday for HK$16.5 million after slashing the asking price by HK$1.5 million.”

The Australian Financial Review. “Beijing’s crackdown on widespread bribery, backhanders and high-level gift-giving have been linked to outcomes as diverse as a sharp drop in Swiss luxury watch sales, a spike in demand for four-star hotels, a surge in Australian property prices and a hike in the prices paid for Chinese art. House prices in Sydney have surged more than 14 per cent in the past 12 months, while Melbourne prices are up 12 per cent. Chinese buyers inject about $5.4 billion per year into the Australian residential property market, Credit Suisse analysts say, and are now ­estimated to be buying up to 12 per cent of new housing supply.”

“Young Chinese professional and prospective Sydney home buyer Stella Lu believes the flow of Chinese investors buying Australian property are split into two camps. Young professionals at one end, and wealthy groups who are prepared to pay whatever cost it takes to secure property, and a safe investment, outside of China. ‘We know some people who are developers and they just come here to buy property without even asking the price,’ she says.”

“Lu was vague on the motivation behind wealthy Chinese moving assets to Australia, but a young Chinese-born agent was prepared to elaborate, on the condition of anonymity. ‘As the government in China tries more and more to find out how people earned their money, they want to move their assets and their money to Australia,’ they say. ‘It’s related to corruption. They think they might want to migrate to Australia, but more than anything they just want to put their money somewhere else outside of China.’”

“Privately, industry members are prepared to be more frank. ‘There’s no doubt there’s this motivation to conceal where they got the money from, through investments offshore,’ an unnamed Melbourne property professional dealing in investment site sales says. ‘It doesn’t mean [all of the investors] are corrupt, it just means China is moving to a more regulated political environment and there’s a lot of caution about.’”

Bits Bucket for March 27, 2014

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