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China's Largest Real Estate Developer Warns of Price Falls

Jamil Anderlini in Beijing
Tuesday, 25 Oct 2011 | 11:19 PM ET

China’s largest real estate developer believes the country’s property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices and volumes decline further.

Apartments in China
Apartments in China

China Vanke, the country’s biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volumes in 14 of the country’s largest cities halved in September from a year earlier.

“We can see a trend of declining sales, especially in the major cities,” Shirley Xiao, executive vice-president at China Vanke, said on a conference call with investors on Tuesday. “Prices have begun to decline little by little so we think even buyers who are able to buy will choose to wait for now because they’re targeting even lower price cuts.”

In recent days, small and sporadic demonstrations have broken out at a handful of real estate sales offices in large cities such as Shanghai, with angry recent homebuyers organising sit-ins and demanding refunds after developers started offering discounts on neighbouring apartments to attract new customers.

Investors and analysts are watching the Chinese real estate sector closely for signs of collapse because of its importance to the overall economy and the effect a crash could have on everything from global steel and copper prices to social stability in the world’s second-biggest economy.

A 30 percent drop in property prices would precipitate a collapse in fixed investment in China and the country’s investment-driven economy would experience a so-called hard landing after years of annual growth above 9 percent, according to UBS economist Wang Tao.

Property investment accounts for more than 20 percent of total fixed investment in China and UBS estimates almost 30 percent of final products in the economy are absorbed by the property sector.

“A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now,” Ms Wang said.

Debt-laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects in recent years.

These local authorities also account for up to 30 percent of all outstanding bank loans, many of which are collateralised by land and housing developments, so a collapse in the property market could have a devastating knock-on effect on the financial system.

A property crash could also be politically destabilising as it would especially hurt the country’s newly minted property-owning middle class, who are the most important constituents for the ruling Communist party.

Ms Xiao of Vanke said the developer expects price declines in the market to be slow and gradual but if developer discounts become more severe Vanke will follow with its own price cuts.

Average housing prices for the entire country still increased in September from a year earlier, according to official data, but the rate of increase slowed markedly.

Despite falling sales and the difficulties they face getting funding, developers are reluctant to offer steep discounts because they hope the government will rescue the market by lifting credit and housing purchase restrictions introduced over the past year.

“Right now we have a standoff between homebuyers, developers and the government and everyone is taking a wait-and-see attitude,” Du Jinsong, a real estate analyst at Credit Suisse, said. “This could be very dangerous because if developers all wait until the very last minute to offer discounts the downside for the whole market will be significant.”

On Saturday Chinese premier Wen Jiabao suggested that government support for the property market is unlikely to come soon as he urged all levels of government to continue strictly implementing Beijing’s tightening measures.

Vanke said its third-quarter net profit rose 32 per cent from a year earlier to 606 million yuan ($95 million).

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