Chinese developers pull back as property downturn hits economy
By
Clare Jim SHANGHAI (Reuters) - China's efforts to cool its property
sector look to have been more effective than intended, as a sharp drop
in construction activity and falling prices threaten what had been one
of few firing engines of the world's second-largest economy. The
government has long…
Reuters
Fri, May 9, 2014, 5:41pm EDT - US Markets are closed
Chinese developers pull back as property downturn hits economy
By Clare Jim
May 8, 2014 5:04 PM
A garbage collector walks past residential and office buildings in construction, in Hefei, Anhui province, …
By Clare Jim
Chan said the developer has no plans to revise its project pipeline and full-year sales target, but others are feeling the pressure from credit curbs and chronic oversupply in some cities.
In March, government officials told Reuters that Zhejiang Xingrun Real Estate Co, based in the coastal city of Ningbo, was on the brink of bankruptcy.
On Thursday, Guang Real Estate Group Co, based in the southern city of Shenzhen, said it had failed to deliver some properties to homebuyers on time due to financial pressures.
OVERSUPPLY
Even Beijing has a problem with excess supply. Figures from data provider China Real Estate Information Corporation (CRIC) show more than 13 months supply of unsold housing in the capital, an increase of 80 percent from a year ago.
"Due to the impact of oversupply, it will be difficult for the market to come out from the correction in the first half of the year; the extent of price cuts may further expand under the pressure to sell inventories," CRIC said.
Last week, media reported developer Gold Tai Yuen Group cut prices by 30 percent on a high-end project still being built in Shanghai, as only seven apartments out of 113 had been sold since it went on the market last October. The company was unavailable for comment when contacted by Reuters.
CRIC said large developers had joined followed smaller firms in cutting prices in the eastern city of Hangzhou, one of the bigger cities to experience a steep property correction.
Developers pointed out that it is difficult to halt or delay projects, because they could be fined or even have their land seized if they fail to finish construction within a time limit.
So some are adjusting their business models. Shanghai Changzhou Property Co will now lease out its office projects, rather than selling them.
"Land is very expensive now. With investors watching the market, turnover will not be quick. By leasing we can generate a more stable cash flow," sales department manager Andy Wu said.
FLOW-THROUGH EFFECTS
CRIC figures for April show the area of property sold in Beijing and Guangzhou plummeted an annual 46 percent and 40 percent respectively, while Shanghai and Shenzhen down 29 percent and 26 percent respectively.
At land auctions, an important source of funds for debt-strapped local governments, the construction area sold dropped 83 percent, while the total sold value declined 10 percent.
The downturn could flow through to some 40 other related industries, ranging from cement to furniture.
"We think a more persistent and sharper downturn in the property sector is the biggest risk for China's economy in the next couple of years," said UBS economist Tao Wang in a report.
"A big drop in construction activity even without a large price correction would likely have serious negative impact on the industrial complex and, through that, economic growth and bank balance sheets."
UBS said a 10 percentage point drop in construction volume growth would chop 2.5 percentage point off economic growth.
Banks may loosen their lending to property developers later into the year, some market watchers said.
James Macdonald, head of China research for Savills, was looking for investment to pick up around the middle of the year, as he said banks had more capacity to lend to developers early in the year.
SHANGHAI
(Reuters) - China's efforts to cool its property sector look to have
been more effective than intended, as a sharp drop in construction
activity and falling prices threaten what had been one of few firing
engines of the world's second-largest economy.
Developers know the market is struggling -- their inventory is rising
and prices are falling -- but expect that authorities will relax their
tight grip on the sector in coming months.
The government has long made it clear that economic growth would
moderate as it tries to reform the economy. But by keeping the pressure
on property too long, analysts fear the fallout will be more severe than
anyone had expected.
"To us,
it is no longer a question of 'if' but rather 'how severe' the property
market correction will be," Nomura analysts said in a report.
New housing starts in the first quarter fell 25.2 percent compared to a
year ago, Nomura calculated, as tighter credit conditions, oversupply
and falling prices undermined the market.
They estimated the property slump could take a full percentage point
off China's economic growth this year, knocking it below 7 percent for
the first time since 1990. The government is targeting growth of about
7.5 percent.
The downturn
really gained traction in late 2013 after more than four years of
government efforts to tame record home prices and avoid an asset price
bubble. Authorities also wanted to channel money towards consumption and
productive investments.
"When sales slow and there are still
inventories, the development momentum can moderate slightly; there's no
rush,' said Adrian Chan, assistant to the chairman at Guangzhou R&F
properties <2777 .hk="">.Chan said the developer has no plans to revise its project pipeline and full-year sales target, but others are feeling the pressure from credit curbs and chronic oversupply in some cities.
In March, government officials told Reuters that Zhejiang Xingrun Real Estate Co, based in the coastal city of Ningbo, was on the brink of bankruptcy.
On Thursday, Guang Real Estate Group Co, based in the southern city of Shenzhen, said it had failed to deliver some properties to homebuyers on time due to financial pressures.
OVERSUPPLY
Even Beijing has a problem with excess supply. Figures from data provider China Real Estate Information Corporation (CRIC) show more than 13 months supply of unsold housing in the capital, an increase of 80 percent from a year ago.
"Due to the impact of oversupply, it will be difficult for the market to come out from the correction in the first half of the year; the extent of price cuts may further expand under the pressure to sell inventories," CRIC said.
Last week, media reported developer Gold Tai Yuen Group cut prices by 30 percent on a high-end project still being built in Shanghai, as only seven apartments out of 113 had been sold since it went on the market last October. The company was unavailable for comment when contacted by Reuters.
CRIC said large developers had joined followed smaller firms in cutting prices in the eastern city of Hangzhou, one of the bigger cities to experience a steep property correction.
Developers pointed out that it is difficult to halt or delay projects, because they could be fined or even have their land seized if they fail to finish construction within a time limit.
So some are adjusting their business models. Shanghai Changzhou Property Co will now lease out its office projects, rather than selling them.
"Land is very expensive now. With investors watching the market, turnover will not be quick. By leasing we can generate a more stable cash flow," sales department manager Andy Wu said.
FLOW-THROUGH EFFECTS
CRIC figures for April show the area of property sold in Beijing and Guangzhou plummeted an annual 46 percent and 40 percent respectively, while Shanghai and Shenzhen down 29 percent and 26 percent respectively.
At land auctions, an important source of funds for debt-strapped local governments, the construction area sold dropped 83 percent, while the total sold value declined 10 percent.
The downturn could flow through to some 40 other related industries, ranging from cement to furniture.
"We think a more persistent and sharper downturn in the property sector is the biggest risk for China's economy in the next couple of years," said UBS economist Tao Wang in a report.
"A big drop in construction activity even without a large price correction would likely have serious negative impact on the industrial complex and, through that, economic growth and bank balance sheets."
UBS said a 10 percentage point drop in construction volume growth would chop 2.5 percentage point off economic growth.
HOPE FOR RESPITE
Already some local governments have relaxed curbs on home purchases,
and other provinces are expected to follow suit to mitigate the property
downturn.Banks may loosen their lending to property developers later into the year, some market watchers said.
James Macdonald, head of China research for Savills, was looking for investment to pick up around the middle of the year, as he said banks had more capacity to lend to developers early in the year.
"There is still likely to be a contraction in investment for the full
year, but by the mid-point of the year the degree of the contraction
should be smaller," he said.
(Editing by John Mair)
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