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  • Aug 1, 2014
  • Updated: 5:20am
PropertyHong Kong & China
PROPERTY

Developers' big dreams for smaller mainland China cities falling apart

Land buying spree in hope of catching housing boom on mainland spells nightmares for property companies as oversupply forces price cuts

PUBLISHED : Monday, 24 March, 2014, 4:45am
UPDATED : Monday, 24 March, 2014, 5:51am
 

Developers, which went on a land buying spree in smaller mainland cities in recent years, are seeing some of those investments turn into nightmares.

Underdeveloped second and third-tier cities became a magnet for some of the mainland's biggest developers after 2009, when the authorities started imposing austerity measures in a bid to rein in runaway home prices, particularly in first-tier cities where home-ownership was getting beyond the reach of a growing middle class.

The developers were betting that lower land prices and the huge growth potential in such cities could generate attractive returns, but the influx of property investment led to chronic oversupply problems.

As a result, developers have been forced to cut prices, some by more than a third in Changzhou, Hangzhou, Nanjing, Ningbo and Qinhuangdao.

The South China Morning Post recently visited the two cities where the first price cuts were seen this year: Changzhou in Jiangsu province, and Hangzhou in Zhejiang.

The huge unsold housing inventories in the two cities could take 22 months to unload, according to industry observers, compared with the normal 12 to 15 months.

"The Changzhou property market is horrible," said Yang Quanqiao, a director for development at Centaline (China).

Yang said land to be sold in coming years could yield 85 million square metres of gross floor area in Changzhou - which has a population of about 4.5 million - enough to build 850,000 100-square-metre flats.

"Changzhou is a small city with limited investor demand," he said. "The supply will probably be enough for 10 years."

To speed up sales, an unprecedented price war broke out among developers in the city - which media reports have likened to a ghost town - but many buyers stayed out because of fears prices could fall further.

Agile Property and Star River took the lead by cutting prices at their luxury project, Star River, by as much as 36 per cent from the previous launch in December to about 7,000 yuan (HK$8,720) per square metre for bare-shell units. The price for furnished units fell 27 per cent to 13,000 yuan per square metre.

"The Changzhou government immediately ordered Agile to stop the price-cut promotion in order to avert a severe price war," Yang said.

However, the developers sidestepped the government's warning, replacing the "price cuts" mentioned in their promotional materials with "huge preferential offers" instead.

Last week, Great Town - by Dong Fu Ming Cheng Property - was offered at an average 6,900 yuan per square metre, with preferential discounts of up to 1,000 yuan per square metre. The promotion was effective, with a third of the first batch of 360 units sold.

Hangzhou, which saw its housing inventory jump 50 per cent to 120,000 units last year, faces a similar problem.

"A price fall will almost certainly occur in Hangzhou but it's unlikely to be big," said Zhu Ling, a director at Centaline.

Last month, Hangzhou developer DoThink cut prices by 12.2 per cent at its North Sea Park project in the city's outskirts to 15,800 yuan per square metre.

A the nearby Champs-Elysees development, Zhejiang Guang Hong Property began offering 20 per cent discounts that took prices down to 13,800 yuan per square metre.

Zhu said sales in Hangzhou had stalled as investors from Wenzhou and Taizhou - also in Zhejiang province - accounted for just 17 per cent of transactions, compared with a third before 2010, when Beijing introduced rules banning individual buyers taking up more than two flats.

Developers, however, have played down the price cuts in the two cities.

Powerlong Real Estate chief executive Hoi Wa-fong said the media had exaggerated the reductions in Hangzhou.

"We have projects in Hangzhou too," Hoi said. "It is a market with uneven supply.

"The city is expanding outwards. As a whole, the stock will take about 15 months to clear. But it differs in different locations. Where there are price cuts, destocking will take 22 months."

This is the first in a series on mainland property trends. Part 2 will appear in tomorrow's paper

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