Developers who were overly optimistic about the future of the mainland property market and bought land at premium prices two years ago are now paying for their rosy outlook.
Property prices in Beijing, for instance, have fallen by between 15 per cent and 20 per cent since the second quarter of 2010, when the central government began to roll out measures to curb demand and price growth, according to Centaline China data.
Developers which bought sites in major cities between September 2009 to March 2010 have suffered the most as properties fell to levels not seen since early 2010, one property agent said.
'Some of the land prices they paid are now close to the prices of built properties in nearby projects,' he said. 'At the time the buyers expected home prices would increase substantially, which is why they were willing to pay aggressive prices for the sites.
'If they were to launch their projects now they may record a loss, or at best a small profit, as their holding costs have been high and property prices have fallen significantly,' he said.
In 2010, China Overseas paid 22,409 yuan per square metre for a site in Shanghai's Chang Feng district - one of the highest rates ever paid on the mainland.
But finished flats in the area are selling for roughly 30,000 yuan per square Metre. Once construction and marketing costs are factored in, China Overseas may be hard-pressed to turn a profit when it sells the finished flats in the first half of next year.
Consider also Guangzhou Asian Games City in Guangzhou's Panyu district. A consortium (see chart) acquired the land in December 2009 for 25.5 billion yuan, making it the most expensive site in China. Flats there initially sold at a rate of 1,000 a month - and for 13,000 yuan per square metre - after the Asian Games in 2010, the agent said. 'But now sales have slowed, and although developers have cut prices to 11,000 yuan per square metre, they are selling only ten to 20 flats a month,' he said.
Since development costs are estimated to be 8,000 yuan per square metre and prices are expected to fall further, developers may see only a small profit from any remaining flats sold in the present environment.
As a result, some consortium members favoured postponing sales until the market improved, the property agent said.
The impulse to hold on to flats until sentiment improves might also explain why Poly Real Estate has still not launched sales at two residential sites in Guangzhou's Baiyun New Town. It paid 19,632 yuan and 20,605 yuan per square metre respectively for the sites in 2010 and, based on the usual time frame for such projects, should have launched sales late last year.
'The project will have to fetch at least 35,000 yuan per square metre in order to break even and, if the developers want to generate a reasonable profit, they will have to sell their units at 40,000 per square metre,' the agent said.
As such, the developers were likely to slow progress so they could release the project as the market improved, something they hope will happen next year.
Jim Yip Kin-shing, co-head of investment at property agency DTZ, agreed that developers were likely to slow the construction and sale of homes - particularly those in higher-priced developments that were hit the hardest by home-purchase restrictions imposed last year by Beijing.