Bloomberg News

China Developers Ease Sales in Face of Worst Year Since ‘08

January 20, 2012

(Updates with closing share prices in 22th paragraph.)

Jan. 19 (Bloomberg) -- China’s biggest developers slowed home sales toward the end of 2011, bracing for the worst property market in three years as the government vows to keep real-estate curbs.

Contract sales, or sales booked before apartments are completed, dropped 30 percent last month at China Vanke Co., as the country’s biggest developer by market value offered fewer homes from November. Evergrande Real Estate Group Ltd., the second-biggest Chinese developer by revenue, said sales in November and December were the lowest for the year.

Developers are looking for ways to preserve record sales last year as the impact of purchase limits and tighter mortgage requirements imposed by the government spreads. China’s home transactions will fall 10 percent this year, according to Daiwa Securities Capital Markets, while UBS AG says the curbs may boost supply to the highest in a decade.

“If the government doesn’t relax the enforcement on the house purchase restrictions and mortgages by the summer, then we could have a crash in the housing market by the end of the year,” said Andy Rothman, CLSA Asia-Pacific Markets’ China macro strategist in an interview in Shanghai.

China’s home prices had their worst performance in 2011 in December, with only two of the 70 cities tracked by the government posting gains, according to data from the National Statistics Bureau yesterday.

Less Willing

About 16 percent of respondents in China said in a 2011 survey they plan to buy a property in the next two years, down from 22 percent in 2010, according to Credit Suisse Group AG. That makes China the only of seven developing countries in its poll that saw declining willingness for home purchases.

The government has reiterated it won’t back away from real- estate industry curbs, while the financial center of Shanghai and Beijing are among Chinese cities that have said they will continue to impose home purchase restrictions this year.

Evergrande “adjusted the sales rhythm” in November to have a “reasonable base data” for 2012 after beating its sales target, said Chief Executive Officer Xia Haijun last month. It set its contracted sales target for 2012 at 80 billion yuan ($12.7 billion), lower than the 80.4 billion yuan it achieved last year, according to a Jan. 16 statement.

China Overseas Land & Investment Ltd., the biggest Chinese developer listed in Hong Kong, stopped efforts to “actively promote and launch projects in November and will set prices that will factor in the government’s policies and market conditions this year,” said Yang Haisong, the state-owned company’s Hong Kong-based head of investors relations.

‘Not Confident’

Developers “intentionally” slowing down sales at the end of the year “shows that they are actually not confident of their sales this year,” said Peter Bai, a Beijing-based property analyst at China International Capital Corp., the country’s biggest investment bank.

Developers may be facing one of their toughest years in 2012, said Chen Li, head of China equity strategy at UBS. Their cash flow may be “exhausted to zero” by the end of the year as some companies struggle to get financing for projects, said Chen.

Greentown China Holdings Ltd., the biggest builder of the eastern Zhejiang province, is in discussion to sell more of its projects to raise cash, Chief Financial Officer Simon Fung said in a phone interview last month after it sold its stake in a site on Shanghai’s historic Bund for 1.04 billion yuan. Its contracted sales fell 38 percent to 35.3 billion yuan last year.

Trust Loans

Tighter credit conditions led some developers to seek out more expensive forms of financing, including offshore bonds and onshore trust companies last year.

Trust loans are usually debt that’s repackaged into investment products and sold to retail investors, and the loans are typically funded by banks or the investors themselves. The interest rates can vary from 10 percent to 30 percent, according to Samsung Securities (Asia) Ltd.

“The worst time will be the end of the first quarter or the second quarter because some non-listed developers will be forced to cut prices to get capital quickly,” said Eva Lee, a property analyst at UBS.

Smaller developers such as Agile Property Holdings Ltd., trying to meet sales targets at the end of 2011, rushed to sell projects and cut prices to achieve their forecasts, said Alan Jin, a Hong Kong-based analyst for Mizuho Securities Asia. Agile, in which JPMorgan Chase & Co. has a 4.75 percent stake, reported December sales almost doubled from November.

Falling Prices

Prices are sliding as the government curbs begin to be felt in less affluent cities. In the eastern city of Wenzhou, where a credit squeeze on smaller businesses prompted a visit and pledge of financial aid from Premier Wen Jiabao in October, prices fell 1.9 percent in December from the previous month and 6.9 percent from a year earlier, according to the data yesterday.

Home sales last year rose 10 percent, the slowest pace since 2008, according to data released on Jan. 17. In 2008, China’s home sales retreated for the first time since the 1998 privatization of the housing market, dropping 17 percent.

The government may ease the property curbs as early as the middle of the year as an oversupply may be a “disaster” for developers, said UBS’s Chen. Supply will peak at 1.5 times to 1.6 times demand, Chen said.

“I don’t see the physical market recovering before the first quarter,” said Kenny Wu, a Hong Kong-based analyst at JI- Asia Research Ltd. “Developers are watching the direction of the government policies, and may put more properties on the market after seeing signs of easing.”

Not Bad

Still, China’s developers have so far withstood the government’s efforts to prevent an asset bubble. Sales rose an average 16 percent at the country’s top 20 developers from 2010, according to Macquarie Securities Ltd. Vanke’s sales climbed 12 percent last year and exceeded 100 billion yuan for a second consecutive year.

The measure tracking property stocks on the Shanghai Composite Index climbed 2.7 percent at the close to a one-month high, while the benchmark gauge advanced 1.3 percent gain.

“The market was not bad last year,” said Jeffrey Gao, a Shanghai-based property analyst at Macquarie Securities, who said he expects policies to be loosened “marginally.” “The real test will be this year, especially the first half will be even tougher.”

The biggest developers have yet to set official sales targets for 2012, with most indicating transactions will be little changed or grow as much as 20 percent, according to BNP Paribas Securities SA. UBS said it expects developers to set sales targets 10 percent to 15 percent higher than last year.

“I’m sure developers will cut prices pretty aggressively this year,” said Lee Wee Liat, a Hong Kong-based property analyst at Samsung Securities, in a phone interview. “It’s not about margin any more but how do you generate cash to sustain yourself.” He said he expects China home prices to drop 15 percent this year with bigger declines in affluent or so-called tier-one cities.

--Bonnie Cao. Editors: Linus Chua, Andreea Papuc

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at

To contact the editor responsible for this story: Andreea Papuc at

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