China’s Property Developers Slash Real Estate Prices to Court Buyers

October 27, 2011 Posted by China Briefing Reading Time: 4 minutes

By Vivian Ni

Oct. 27 – China’s property developers are actually offering discounts to real estate buyers, as they need higher sales to refill their parched cash flows. Although the price decline has only happened in a few select areas and experts are still hesitant to interpret it as an exact sign of an overall downturn in China’s property market, positive outlook towards the sector is falling as the central government’s efforts to cool housing prices continues.

Price dip
A series of tightening policies aimed at reducing the country’s real estate bubble have put property developers and home buyers in a waiting game. While developers hope the market’s massive population with “rigid demand” will continue buying, many buyers have chosen to wait and see how effectively the government’s cooling measures affect real estate prices. In Shanghai, the city with China’s highest housing prices, commercial housing sales over the first three quarters this year have decreased sharply by 14.9 percent from a year earlier, and the average monthly sales record has also hit its lowest levels since 2005.

Plummeting sales have pushed many property developers towards compromise. Several major real estate companies – including Longfor Properties, Greenland Group, and China Overseas Land & Investment – have started to offer huge discounts ranging between 20 percent and 40 percent on some of their properties in Shanghai. The whole city’s average housing strike price over the last week has slid by 5 percent from a week earlier, according to statistics by the China Real Estate Information Corporation (CRIC).

Shanghai is the foremost location seeing developers offering attractive discounts, however other major Chinese cities are also seeing a fall in real estate prices. In the eastern cities of Hangzhou and Nanjing, new properties are for sale at prices 10 percent to 20 percent lower than older ones in their neighborhood; in Tianjin and Chengdu, discounts are smaller but still stand at roughly 5 percent to 15 percent; In suburban Beijing, companies slashed prices on several well-known property projects by over 20 percent after seeing dipping sales and an increasing vacancy rate.

“This is only going to be a start,” a recent report on Shanghai Securities News commented, citing the words of a real estate agent. The wholesale housing market price has already gone down by at least 15 percent, but some cash-strapped developers are still hoping to strike wholesale deals. If some of them fail to sell their projects as a whole, they are going to try selling them off at the retail market at even lower prices, says the report.

Financial troubles
Property developers are in a rush for quick selling mostly because they cannot afford to wait anymore. The central government’s tightening policies – which put pressure on both buyers and financial institutions – have been drying up regular funding chains for many developers. The second-home purchase restrictions implemented in many cities have discouraged speculative buyers, and the frequent hikes in bank interest rates and the reserve requirement ratio have limited banks’ lending abilities. Banks in need of more cash have even recently increased first-home mortgage rates to levels above the benchmark interest rate, scaring away even more potential real estate buyers.

Struggling to sell more or find more loans, real estate companies are reporting negative cash flow and shrinking profits. According to their recently-released third quarter financial reports, 29 listed real estate companies saw their net operational cash flow decrease to a total of negative RMB1.7 billion, compared to the positive RMB3.1 billion reported at the same time last year. The quarterly net profit of those companies has also plummeted by 40 percent from a quarter earlier.

Uncertain future outlook
Despite the widely reported financial troubles of some real estate companies, most market analysts are still hesitant to predict that China’s housing prices – especially those in first-tier cities – are completely set for a large-scale decline. Xue Jianxiong, an analyst with the CRIC, indicated that the current price dip may be more of a temporary strategy, because “the real purpose of the discounts is to obtain more funding before the year-end.”

A comparatively positive outlook was also given by a recent Moody’s report, which suggested the prevailing estimations on property developers’ financial status may be overly pessimistic. The report said that most of Moody’s rated Chinese developers would not face liquidity risks in the next 12 months, although the overall operating environment is set to become more challenging under the tightening measures.

It may still be too early to tell whether or not China’s property market will actually enter a period of recession, as market watchers need time to tell if the central government will stick to its cooling efforts and how it will manage to deal with conflicts of interest with local governments.

In his speech yesterday, Chinese Premier Wen Jiabao sent out a mixed message regarding the country’s policy environment next year. While emphasizing that containing inflation will still remain China’s primary mission, Wen also pointed out the government policies may expect more flexibility and proper modification in 2012. The speech increased expectations of a slightly more relaxed financial environment, which may in turn reduce the challenges facing property developers.

In addition to its own policy adjustment, the central government may also feel the increasing pressure from local governments, whose fiscal revenue is largely dependent on land sales. On October 11, the southern city of Foshan in China’s Guangdong Province announced that second home purchase restrictions would be relaxed in the city, but 24 hours later, the announcement was called back after “a comprehensive evaluation on the policy.” This interesting incident reveals local governments’ strong concern over their losses as a result of a property market downturn.

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