Mainland developers set for price cuts to boost cash flow

Mainland developers are under pressure to sell at a loss to cope with a downturn that is worse than expected even as buying curbs are relaxed

PUBLISHED : Tuesday, 19 August, 2014, 1:27am
UPDATED : Tuesday, 19 August, 2014, 1:27am

Mainland developers will cut prices, or even sell their products at a loss, to secure enough cash in the rest of this year to survive a market downturn that has so far been much worse than expected, players and analysts said.

Fu Bei, a senior property analyst at global ratings agency Standard & Poor's, said more cities would post home price falls in the coming months.

She expected a 5 per cent drop in average home prices this year compared with last year.

"Even leading developers are under pressure to set prices in line with market changes," Fu told the South China Morning Post. "That means developers' profit margin prospects will turn even more challenging in the second half."

In a sluggish market, developers will need to spend more on marketing and sales. Rising inventories will also increase funding cost.

Since June, more than 30 of the 46 cities that have imposed restrictions on home-buying since 2010 have either relaxed or removed such curbs.

But this has not happened in four first-tier cities, thus spawning frequent rumours about possible relaxation of home purchase curbs or mortgage rules.

China Vanke president Yu Liang said developers should not pin their hopes too much on the relaxation of housing policies.

"Relaxation of home purchase restrictions can boost market sentiment," Yu told reporters yesterday. "But don't expect the market to recover immediately."

Data from the National Bureau of Statistics yesterday showed prices of new homes fell month on month in a record 64 of the 70 cities on its radar last month, the third monthly decline in a row.

Prices of new homes were still on the rise in year-on-year terms in most of the cities, except for three, the bureau said.

"The key to [transaction] volume recovery in the second half would still be credit policy," said a report by Lu Ting, a China economist at Bank of America Merrill Lynch.

There had been signs of improvement in mortgage conditions, with more banks offering discount to benchmark rates and reports of faster loan approvals, Lu added.

However, most mortgage rate discounts are only 5 per cent, a far cry from regulatory scope of up to 30 per cent and not enough to lure potential buyers wary about record-high home prices, other analysts said.

The Shenzhen-listed Homyear launched a project in the city on Saturday that is priced below 20,000 yuan (HK$25,200) per square metre for some three-bedroom units.

Its average price of 23,000 yuan per square metre is also much lower than the 30,000 yuan per square metre for second-hand homes in the neighbourhood.

Ten months ago, China Overseas Land & Investment bid for a piece of land in the same district at 14,500 yuan per square metre.

About 2,000 people queued up for the first launch of 570 units, which then rose to 810 units. By sunset, more than 90 per cent of the flats have been sold, and some buyers literally fought each other to get their favoured flats, according to media reports.

"This shows demand is there as long as developers can cut prices sufficiently," said Lin Jianhui, the head at the Shenzhen office of China Index Academy, the mainland's biggest real estate data provider.

Zhou Chen, a deputy head of the Hangzhou branch at consultancy Century 21st China Real Estate, said some developers had already priced their projects at a loss just to generate cash flow.

The costs of sales at Vanke, the country's biggest developer by sales, rose 2.9 per cent in the first six months from a year earlier to 28.3 billion yuan.

Finance cost grew 18.3 per cent to 803 million yuan, while revenues fell 1.1 per cent to 38.5 billion yuan.

"Developers should no longer measure [performance] simply on profits or losses. Cash flow is very important," Yu said, adding that the company would pursue "active sales" strategies by sticking to its bottom line of 60 per cent destocking of any new projects within the first month.