May 30, 2014

CHINA: Unicorns And Zero Down Payments? China's Developers Get Desperate; China’s Ghost Cities to Get Spookier

Wall Street Journal
written by WSJ China RealTime staff
Thursday May 29, 2014

On an empty street in a remote suburb of Beijing, a huge golden unicorn stands guard over Season Joy City, a half-finished development of a dozen tower blocks set in 50,000 square meters of manicured parkland.

About a third of the apartments are sold, but with increasing signs that China’s property market is turning sour, the developer behind the project is trying to hurry things along.

Season Joy City offers a party bag of bonuses to lure potential buyers. The development’s original selling point was “buy one floor, get one free.” When China Real Time visited last week, helpful sales assistants also offered to throw in kitchen fittings and four air conditioning units for nothing.

But the biggest draw is a “zero down payment” scheme, available for a two-and-a-half-week period only. At first sight this seems to go against government regulations, brought in to keep house prices under control, which stipulate a minimum 30% down payment on ordinary residential purchases.

Zero down payment schemes have popped up around China as developers go to ever greater lengths to shift apartments, but Season Joy City may have the distinction of being the first to try it in Beijing, said Tang Li, an analyst at North Square Blue Oak, an investment bank.

“They will help homebuyers to apply for this consumer loan that they can use as a down payment,” said Mr. Tang. “It’s very difficult to judge whether this is in line with the regulations or not. So far there’s been no punishment from the government.”

All this is to avoid cutting prices, which developers could fear could tank public faith in the housing market and ultimately pummel sales further. Instead, they resort to ingenious “promotions,” throwing in freebies worth thousands of dollars and even whole free rooms rather than slashing prices outright.

At Season Joy City, the price remains unchanged at 14,800 yuan per square meter (the second floor isn’t included in the calculation.) That means a 90 square meter apartment would clock in at 1.3 million yuan ($208,000).

The developer behind the project, Beijing Pearl River Real Estate Development, says it will help customers arrange a loan from Soufun, real-estate brokerage, to cover at least part of the down payment – although salespeople said the exact amount and conditions would depend on the buyer’s creditworthiness.

“It’s too large a pressure for our buyers to pay 50% in down payment up front,” said a saleswoman, Li Xiaona. “We lend them a hand so they can have a sort of a buffer.”

The zero-down payment promotion has attracted plenty of attention. About 100 buyers signed up in the first two days, Ms. Li said, although the rush soon faded.

Only a handful of prospective buyers were at the showroom when China Real Time visited, a striking shift last year, when mobs of eager customers around the country routinely entered lotteries just for the chance to buy similar apartments.

“I’m here for the zero down payment,” said one homebuyer, a 52-year-old businesswoman from nearby Liaoning province. “Otherwise I wouldn’t have come.”

Many analysts believe that China’s largest cities will hold up relatively well in the slowdown sweeping the property market. But developments like Season Joy City, 20 kilometers from downtown Beijing, may still suffer.

“It’s very clear that developers are in a hurry to sell,” said Rosealea Yao, a Beijing-based analyst at research firm Gavekal Dragonomics. “Developers in the suburbs always see the biggest decline in sales and prices [during a downturn].”

In Season Joy City’s showroom, a billboard explains why house prices won’t fall in China. The property market is a big contributor to the economy, it says, so the government won’t allow prices to fall.

“If the property sector is in deep trouble, it’s going to affect a whole lot of industries and that will drag down the entire economy,” said Liu Qinglong, assistant sales manager at the development. “I think in the future the government will set up a long-term mechanism to ensure steady growth of property market.”

But with buyers standing on the sidelines and some developers starting to sound desperate, the government’s ability to support the market may soon be put to the test.


Wall Street Journal
written by Chester Yung
Wednesday May 14, 2014

China’s ghost cities, especially in smaller, more far-flung places, look set to get even spookier over the next few years.

CLSA analyst Nicole Wong and a team of analysts spent a year on the ground in China, examining 810,000 property units at more than 600 projects across a dozen cities.

Their resulting research suggests that the real problem in the real-estate market is the serious excess in third-tier cities.

China’s vacancy rate for property completed in the past five years is 15% –equivalent to 10.2 million empty units. While that rate isn’t especially troubling yet—it’s 10% in the U.S.—what is worrisome, Ms. Wong suggests, is the fact that it is rising and expected to exceed 20% between 2016 and 2017, largely buoyed by overinvestment.

The CLSA analysts also found that third-tier cities such as Tangshan and Wenzhou generally had higher vacancy rates, 16% on average, versus 10% in Beijing and Shanghai and 13% or lower in second-tier cities such as Nanjing, Chongqing and Shenyang.

Ms. Wong argues that these excess empty units reflect too much spending on property; China last year spent 12% of its gross-domestic product on new home sales—the highest level ever—which she called unsustainable.

While mature markets like the U.S. show periodic upticks in their ratio of new home sales to GDP, they still remain well below 10%, she said. Amid the post-war building boom of the 1950s, the U.S. ratio was just 5.9%, while it peaked again in 2005 at 3.1% amid the loose credit environment before the financial crisis. Even for Hong Kong , a city with limited land resources where property is considered a way to store wealth, the ratio peaked at 8%-9% between 1997 and 1998, just before the bubble burst, she added.

She predicts some tough times to come for developers in smaller cities, predicting that sales in third-tier cities will see sales shrink by 60% between 2013 and 2020.

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