May 14, 2014

Selling Their Products At Prices Lower Than Cost

The Beijing Review reports from China. “Returning from a stint as a visiting scholar at Cambridge University, Wang Shi, didn’t change his straightforward style of communication. ‘People can no longer expect to be laughing all the way to the bank simply by purchasing properties, and the mushroom growth of China’s housing market will begin to slow down,’ said Wang, Chairman of Vanke, the largest real estate developer in the country, in an interview with Caixin website.”

“In some regions, housing prices have dropped remarkably and caused a cluster of systematic risks, resulting in local economies being caught in a vicious circle. Take Yuyao, a county-level city in Zhejiang for example. Since most local enterprises have had a finger in the real estate pie, the fact that the prices of some high-end houses fell by 40 percent has caused its real economy to be dragged to the brink of an abyss.”

From Reuters. “Shenzhen-based Guang Real Estate Group said the delivery of a small number of homes and apartments in the southern city of Huizhou had been delayed, but added it had compensated the buyers and promised to complete these projects eventually. The developer also denied media reports that it was on the brink of collapse. ‘We are facing some capital pressure, but the banks in partnership still care about us and we are confident in pulling through this hard time,’ an official from the company told Reuters. ‘Some media said we are on the brink of collapse, which is not true.’”

“The company said it would borrow from banks, funds and trusts, as well as speed up new projects for sale, in order to ease the liquidity crunch.”

The New York Times. “The chairman of a large developer with operations across China said that offering price discounts for the remaining units in half-sold projects was extremely difficult, because earlier buyers could protest and demand refunds equal to the discounts. The potential for protests, and not banking sector exposure to real estate, ‘is what concerns me,’ said the developer, who spoke on the condition of anonymity.”

“But Winnie Y. Cheng, the research director at Centaline, said that many developers could not afford to hold apartments off the market indefinitely and were already cutting prices. Street protests have occurred, notably in Hangzhou, although earlier buyers have mostly accepted the discounts for later buyers, she said. These days, she added, ‘All of the developments are willing to cut their price.’”

“Su Hua, a real estate broker in Shenzhen, had his highest commissions ever last year, as a speculative frenzy prompted families all over China to buy and sell apartments at a brisk pace. But he sat in a deserted office late last week. Mr. Su worries that the market tumult shows no sign of ending. ‘There is not much else I know how to do,’ Mr. Su said. ‘Maybe I will consider selling insurance on the side, if business continues to slow.’”

Want China Times. “In Shenyang, there were five plots of land on offer at an auction on May 5 but only one was sold successfully for 930,000 yuan (US$149,000), which was close to the floor price. The five plots only attracted three bidders on site even though their starting prices were relatively cheap, with the most expensive one priced at 1,584 yuan (US$254) per square meter.”

“An executive working for a developer headquartered in Guangdong and operating in Shenyang in the northeast said he already feels the chill in Shenyang’s housing market. His company’s regional president told him that inventory in the city is too high and that he has been unable to sell the units despite lowering prices. A source from the industry pointed out that another developer that topped sales charts has been selling their products at prices lower than their cost.”

“In April, housing inventory in Beijing was up by 10% to 8.64 million square meters from a month earlier while Guangzhou experienced the same with an 8% growth to 78.49 million square meters.”

From Shanghai Daily. “Shanghai’s new housing market remained weak for another week as sentiment among homeseekers and real estate developers was extremely sluggish. The average cost of the new homes fell 4.1 percent from the previous seven-day period to 26,777 yuan ($4,293) per square meter, Shanghai Uwin Real Estate Information Services Co said in a report.”

“‘The slack momentum was really uncommon for this time of the year as May often sees robust transactions of homes because the market has fully rebounded from the seasonal low of the Spring Festival,’ said Huang Zhijian, chief analyst at Uwin. ‘To make it even worse, the developers all seemed very hesitant to release their projects as they are still struggling whether to offer significant discounts to unload their supplies.’”

From Caixin Online. “China’s housing market has reached a tipping point and transaction volumes will begin to shrink, an analyst with Hong Kong-based brokerage and investment group CLSA Asia-Pacific Markets said. ‘We really think this year is a tipping point for the industry,’ Wang Yan, director of the CLSA’s property research department, said. ‘From 2013 to 2020, we expect the sales volume of the country’s property market to shrink by 36 percent.’”

“The research was based on a CLSA survey of 609 completed residential communities that included 800,000 units in 12 cities. It found that 15 percent of the homes were vacant on average. The research also presents figures that show the country’s supply of residential properties has far outstripped demand. CLSA found that every year about 10 million homes were built while only 7 million were needed. At the current speed of building and sales, the vacancy ratio is set to increase further, with 3 to 4 million unwanted homes completed every year, the research shows. By the end of 2017, the total excess supply could hit 18 million, which could be worth 35 percent of GDP.’ ”

“‘The stock in third-tier cities has been building up all the time, but their capacity is limited,’ Wang said. ‘So they can keep on building but no one will buy.’”

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