BEIJING, July 26 -- After years of riding the real estate tidal wave, property developers are being forced to adjust their stance.
Government policies designed to cool the market have started to bite and nowhere is the pain more keenly felt than Shanghai, the heart of the property whirlpool that has sucked in hundreds of billions of yuan in investment.
In June, sales of new apartments and houses tumbled 31 per cent from the previous month, nearly 40 per cent of new properties coming onto the market failed to find buyers and Centaline, one of Shanghai's largest real estate agents, reported a 40 per cent drop in business.
The previously common sight of people queuing up to buy new apartments on the first day of sale is now nothing but an increasingly distant memory.
Unsurprisingly, Shanghai's property prices, especially those at the top-end of the market, have dropped significantly over the past few months.
Elsewhere, although prices in other cities, including Beijing, Guangzhou and Shenzhen, are said to be holding up, the word among agents is that sales are already on the slide as potential buyers wait for prices to fall.
One knock-on effect of the slow down is that highly leveraged property developers, those most dependent on a rapid turnover to meet debt repayments and generate profit, are feeling the squeeze. The average debt-to-equity ratio of property developers listed on the Shanghai stock exchange is more than 65 per cent, and any safety margin companies do have in their debt repayment capability could be quickly eroded by a prolonged slowdown in sales and the accompanying drop in prices.
But the hardest blow to property developers is likely to be banks' dampened interest in financing new projects, a result of the government's call for credit restraint in the property market.
Since the beginning, China's property boom has been largely fuelled by easy credit and low interest rates on repayments.
The latest central bank figures show outstanding loans by all banks to the property sector totalled 2.77 trillion yuan (US$346 billion) at the end of 2005, up 16 per cent from a year earlier.
But the ready supply of credit is set to end. Steps have already been taken to curtail lending to property developers.
"For bankers and (real estate) developers the honeymoon is over," says Zhang Tao, a senior analyst at Centaline. "It is becoming harder and harder for property developers to secure bank loans."
Finance industry sources said some banks, including Minsheng Banking Corp, are even considering a moratorium on property development loans. Meanwhile, all lenders are said to have tightened credit policies for lending to property developers.
"A lot of property developers aren't going to be getting any fresh loans from their bankers in the coming months," predicted Wang Shujuan, a senior analyst at Shanghai stockbrokers Haitong Securities. "They will have to adjust to the lean times ahead," he added.
Michael Hart, director of China research at Jones Lang LaSalle, an international real estate agent, said he expects to see extensive consolidation of the property market in all China's major cities. Many small to medium-sized property developers will be forced to sell off at least some of their land holdings to finance on-going projects and service debts, he predicted. In Hart's view, a more mature market with less imbalance in supply and demand should emerge as a result of the consolidation.
Lina Wong, managing director of Colliers International (East China), a unit of the multinational real estate agency, also expects to see casualties among the small to medium-sized property developers. A new rule shortening the time allowed between purchasing land and developing it, will force many cash-strapped developers to sell up to larger developers, she predicted.
A recent report from Wind Information Co, an independent research firm, suggested 30 per cent of the 2,000 or so property developers in Shanghai would quit the market before the end of 2006.
Even the largest developers will have to drastically adjust their business strategy in light of the new government measures and revised bank lending policies.
Shanghai Greenland Group, one of the country's five largest property development companies, with annual sales in excess of 15 billion yuan(US$1.8billion), is fast tracking plans to raise capital in international markets.
According to Zhang Yuliang, president of Shanghai Greenland, credit tightening is "wreaking havoc" on property markets across the country. He admitted that sluggish sales have put the brakes on the company's previously rapid expansion. In the past two years, a more than 40 billion yuan (US$5 billion) spending spree has seen Shanghai Greenland extended its property development portfolio to 17 cities, including Beijing, Xuzhou and Changzhou.
But sales of Greenland properties in 16 of those cities have plummeted by up to 50 per cent since government measures to cool the market came into effect. In some cities, sales tumbled by 60 to 70 per cent, Zhang said.
"We are keen on raising additional capital in the near future," he adds. "We hope we can attract investment from some of the larger international property trusts." And he has reason to be optimistic last year, Shanghai Greenland secured a 700 million yuan (US$87.5 million) loan from Germany's Hypo Real Estate Bank International.
(Source: China Daily)
