Down-payment rule fuels sell-off in property stocks

PUBLISHED : Saturday, 19 December, 2009, 12:00am
UPDATED : Saturday, 19 December, 2009, 12:00am

Beijing's decision to lift the threshold for land purchases and cool an overheated real estate sector has prompted a sell-off in property stocks over the past four days.

According to a statement on Thursday from the Ministry of Finance, the People's Bank of China and other government agencies, land purchases now require a down payment of at least 50 per cent of the total price.

Premier Wen Jiabao on Monday also questioned the sharp rises in the property market, adding to fears about the sector.

The buyer is also required to pay the outstanding balance within a year, although in special cases this period can be extended to two years.

'The move will definitely put developers' cash flows under considerable pressure,' said Xavier Wong Kit-hung, the head of research for Greater China at Knight Frank.

It would force developers to speed up marketing of new projects to generate cash if they planned to replenish their land bank, he said.

An increase in the number of projects being put up for sale would help slow the growth in property prices, he added.

Lawrence Hui Wai-man, the chief financial officer at Shimao Property Holdings, said the current standard down payment for land purchases ranged from 8 per cent to 10 per cent of the purchase price for sites sold through private negotiation.

The schedule for the outstanding balance would be subject to negotiation with the local governments, he said. 'Under the new rule, we have to stack up lots of cash if we want to buy land.'

However, he said the new rule would not affect Shimao's land replenishment because any decisions on buying sites would be determined by development cost and the plots' potential. 'We will not stop buying land because of the higher down payment requirement as we can arrange financing through internal resources.'

The higher down payment rule follows a surge in the mainland property sector since the second quarter. Many development sites have fetched record prices this year.

However, Hui said most of the record sites had been bought by state-owned enterprises, not privately run or listed companies. 'They have the deepest pockets for sites,' he said.

It was reported that the authorities also summoned vice-mayors from more than 600 cities to an annual housing meeting yesterday. It is rare for so many local officials to be assembled, showing the importance of efforts to curb property price gains, according to the 21st Century Business Herald.

Hit by the new rule and Wen's repeated warning of excessive price rises in some cities, nervous investors have sold down property stocks since Tuesday.

Shares in Greentown China Holdings have dropped 18 per cent since Tuesday before closing at HK$12.06 yesterday, down 2.9 per cent from Thursday.

Shimao fell 5.2 per cent to close at HK$14.44, accumulating a loss of 14.3 per cent since Tuesday, while China Overseas Land & Investment dropped 1.9 per cent to HK$16.32. The stock has lost 11 per cent since Tuesday.

Longfor Properties fell 8 per cent to HK$8.30.

On the mainland, China Vanke, the country's largest developer, dropped 6 per cent to 10.59 yuan (HK$12.03). Poly Real Estate tumbled 7.5 per cent to 21.88 yuan.

Cash-rich builders

Land purchases on the mainland now require a down payment of at least: 50%