China's Once-Hot Property Market Turns Polar

Real estate developers survived a tough 2011 but now face a more challenging some say wintry business climate

Flexible marketing strategies that helped some residential real estate developers beat 2011 sales targets may prove no match for government policymakers who've taken a rigid stance on housing market controls for 2012. Thus the credit and home buying controls phased in by the government since 2010 are likely to have more of their desired effects by cooling home prices and discouraging flat! flipping in coming months. For developers that means a more challenging business climate. "ndeed executives from several ma#or developers who spoke with $aixin recently said they sense a long figurative winter settling in as revenues decline and credit remains tight. %ergers and takeovers are likely to whittle developer ranks while slackening demand will slow construction and pinch profit margins for developers that survive. &ome developers have trimmed construction plans for 2012 or shifted their focus to affordable housing. %ost executives said they're looking ahead with a mix of pessimism and caution' &o far they see little to cheer in the new year. (Things will be very difficult in 2012 ( said %ao )a*ing vice president of $hina +anke $o. ,td. one of $hina's biggest developers at a -ei#ing press conference in )ecember. ("t will be a winter and a test for the entire industry.( Financial Chill $old winds started blowing in the fourth *uarter 2011 as a policy!encouraged credit crunch prompted some banks to stop issuing mortgages to first!time home buyers. .ome shoppers

in cities such as /an#ing $hong*ing and 0uhan were affected by free1es on mortgage loans announced by "ndustrial -ank $o. ,td. and $hina $"T"$ -ank. "n an interview with $aixin %oody's "nvestors &ervice "nc. +ice 2resident 3hong 0en*uan warned that mainland developers with .ong 4ong!listed stock may find financing especially difficult in 2012. 5lthough some government policymakers have referred to (fine!tuning( real estate market controls in 2012 hinting that regulators may allow looser credit industry insiders remain skeptical about the overall financial environment. 5n executive at one central government!controlled real estate developer who asked not to be named told $aixin he thinks lending (will still be tight in 2012( across the board even though (state!owned enterprises may have some advantages and may get a few more loans than others.( "n addition to successful debt refinancing flexible marketing techni*ues such as sales promotions kept cash flowing for most developers through the first three *uarters of 2011. -ut a steep decline in sales started in 6ctober and continued into the new year which has led to a full!blown li*uidity crunch for many companies. 3hong said %oody's is now (most worried about( developers who previously borrowed from overseas investors or whose stocks trade in .ong 4ong and are not allowed by regulators to issue bonds for fear they won't repay the debt. &ome may be unable to repay foreign investors he said at a time when (the overseas financing market is very bleak right now and the overall international economic situation is not optimistic.( /evertheless 2011 sales were generally good for $hina's 10 biggest developers according to trade group reports. 2oly 7eal 8state 9:roup; $o. ,td. 8vergrande 7eal 8state :roup $hina 7esources ,and $o. ,td. and $hina 6verseas .oldings ,td. met their annual sales targets in advance. &ector analyst $entaline 2roperty said +anke and 8vergrande were the nation's top!selling developers in terms of gross revenues through the <anuary!/ovember period last year. +anke's sales of about 10 million s*uare meters of housing raked in more than 11= billion yuan while 8vergrande's 2011 sales topped >? billion yuan exceeding its annual sales target a month early by 1@ percent. &ome developers kept the ball by building fewer luxury apartments and villas while focusing on mid!priced and low!end housing. +anke and 8vergrande for example reported that affordable housing comprised up to ?0 percent of their new pro#ects started in 2011 compared to A0 percent in 2010. %oreover 8vergrande drummed up plenty of business in third! and fourth!tier cities beyond &hanghai -ei#ing and provincial capitals with saturated markets. 6ne developer that tried to follow the old luxury!first marketing path found sales fall off a cliff. 6nly = percent of $hina :reentown's sales last year were tied to affordable housing pro#ects and high!end sales skidded. 5s a result the company reported only @0 billion yuan in sales B a mere =A percent of its 2011 target. Strategic Shifts %ost developers battled the changing business climate by ad#usting prices. +anke $hina 6verseas and 8vergrande cut prices starting in 5pril and stretched their promotions to include many cities with discounts gradually increasing to around @0 percent from 10 percent.

5 +anke sales manager in -ei#ing said initially the price cuts were intended to (buy time( while the market improved. -ut sales in &eptember and 6ctober were still unsatisfactory he said and some developers responded by reducing prices. The discount results were not as good as they would have been if the developers had cut prices earlier in the year though the sales manager said. Third!*uarter price cutters include 7CF 2roperties 5gile and :emdale. 0ith government real estate controls expected to continue through 2012 most developers have resigned themselves to challenging sales and lower prices. :aps in sales revenues that separate large and small developers in $hina are likely to widen in 2012 predicted $hina "nvestment $apital $orp. real estate analyst -ai .ongwei. %a#or players are likely to weather the storm he said while small companies may be forced into takeovers or simply fold. ,ongfor 2roperties $o. ,td. plans to follow a fast!capital!turnover strategy with flexible marketing product structure ad#ustments and cautious land buying a company executive said. $aution toward land ac*uisitions at ,ongfor and other companies point to the risks perceived across the board in the real estate sector. "n a sign of easing $entaline said only about 21 percent of all sale revenues accumulated last year by the nation's 10 largest developers went toward buying land. %oreover %oody's 3hong said he's especially worried that developers are buying (the wrong land ( that is high!priced land and wasting precious capital. The %inistry of ,and and 7esources recently issued regulations designed to discourage land hoarding by developers. (" know many developers have hoarded a lot of land( in anticipation of future construction pro#ects said developer &unshine 100 +ice 2resident Fan Diaochong. The latest regulation may force developers to build on now!vacant sites but (after construction they will be unmarketable.( Fan says his company plans to (use flexible pricing to boost sales( in the coming year while concentrating on second! and third!tier cities B which he called (the main battlefield for developers( B while offering (small apartments that common people can afford.( (0e won't dump 9property on the market; in a panic ( Fan added. :emdale $86 .uang <uncan said business in 2012 will be (even worse( than in 2011 (but the market foundation is still there and the right products will still be sold. The main targets are first!time buyers and customers looking to improve their housing. (:emdale's strategy in 2012 is to continue ad#usting products according to the market situation ( .uang said. 8vergrande $hairman Du <iayin said his company expects stable not high growth in sales volume likely in the 10 to 20 percent range. 5t +anke $86 Eu ,iang said the developer would set cash flow as a priority above profit margins try to avoid unsold inventory and land hoarding buy land cautiously and prepare for a long fight against competitors. +anke has also decided to try marketing tiny 1=!s*uare!meter apartments in -ei#ing and Di'an. "f buyers respond well the company could start offering small flats nationwide. "n the commercial sphere executives from ,ongfor :emdale and &ino!6cean told $aixin they plan to spend conservatively. Eet the developer $"$$ 7eal 8state says the rising capital levels flooding commercial real estate pro#ects could easily form a bubble market in 2012. $ommercial sector sales should grow at least 1= percent annually through 2012 far more *uicker than the residential housing market which is expected to grow = percent annually.

&ome analysts fear a commercial property bubble will grow as more mainland investors sink money into real estate trusts. 5nd 0ang Eongping vice president of the trade group $hina $ommercial 7eal 8state 5lliance said the government's decision to continue tight real estate market controls in 2012 means (one cannot rush into commercial real estate. "t's absolutely not a safe haven.( 5 commercial property surplus is weighing down markets in some cities 0ang said keeping rents low and develop profits thin. &ome developers that rushed into commercial real estate have been forced to shelve pro#ects or sell property at cost.