CHINA: As China's Property Market Sputters, Who Will Blink First? Developers, Buyers Or Government?

The Wall Street Journal

China’s Game of Real-Estate Chicken

written by WSJ China RealTime staff

Friday May 30, 2014

The main question in China’s housing downturn: Who will blink first? Whether buyers, developers or the government, it will say a lot about how China manages increasing challenges facing its housing market. Amid such a stalemate, will policy makers step in? As the WSJ’s Wei Gu reports, so far, they look determined not to:

“Now there is a stalemate,” said David Hong, head of research at data provider China Real Estate Information Corp. “Developers are betting the market will bottom soon, once the government succumbs to growth pressure.”

Buyers seem least likely to give in. Property sales by value fell 10% in the first four months of the year as people took a wait-and-see approach, holding back for bargains.

Developers have been hanging tough, too, holding on to their bulging inventories rather than cut prices. But while many can survive a brief slowdown, they are counting on the government to goose demand by loosening liquidity.

That leaves policy makers. They look more determined than in the past not to step in. But real estate, including transactions and construction, accounted for 12.7% of gross domestic product last year, according to J.P. Morgan Chase, and for 15.1% of GDP growth. Any slowdown would put the government under great pressure for measures to keep the economy performing.

…

With prices flat, the number to watch is inventories. Aggressive land buying in the boom years of 2012 and 2013 means more supply in 2014. Inventories in the first-tier and second-tier cities were equal to 14 months of sales volume at the end of April, approaching the high of 16 months hit in February 2012, according to Moody’s. This will lead to pressure on developers’ working capital.

The inventory problem is worse in smaller cities. “Shrinking volumes will be followed by price cuts,” Mr. Shih said. “There is so much oversupply in second- and third-tier cities.”

Some highly leveraged developers can’t afford to just sit on their inventory for much longer. Large developers have been able to roll over their debt, but even they have found it difficult to raise new funds, whether at home or abroad. Small developers are borrowing at exorbitant rates, banks having turned their backs on them.

Developers with large inventories, weak sales and limited access to funding are especially vulnerable to a market downturn and at risk of refinancing difficulties. A number of Chinese developers now don’t have enough cash to cover their short-term debt, according to Moody’s.

Real estate is a top source of revenue for local governments; land sales cover 60% of their budgets, but Beijing is trying to wean local governments off their dependence on land revenues. The shortfall, however, will be hard to make up.