Directly below this article is a story of Vanke blasting along making profits galore. This is not an universal story. Some local developers in China are feeling the pinch from tighter lending standards and the swing from a seller’s to a buyer’s market.

There may only be a tenuous connection with the American sub-prime problems — loans you would never give unless you were barking mad — but the problem is similar in that money is tight and loans are difficult to get on something which has any element of risk. The banks want not just belt and braces as security but also a touch of super-glue.

Few analysts expect an all-out housing crash (remember it was analysts who murmured not a word about the sub-prime crisis when the savvy operators started bailing out well over a year ago).

However, analysts (a bit devalued at the moment) say, the day of reckoning could be at hand for hundreds, even thousands, of smaller developers that leveraged up on land purchases and expanded into new geographic areas amid easy credit.

Flush with cash from sales and pre-sales of yet-to-be-built projects many developers exercised their ambitions at just the wrong time. That is a pretty frightening scenario outlined by Market Watch.

Bei Fu, an analyst of corporate and infrastructure rating with Standard & Poor’s in Hong Kong said, ‘This is going to be a volatile year for players in the sector. The funding channel has tightened significantly since last year.’

Times changed in the fourth quarter last year as the government stepped up austerity measures to cool speculation. What emerged, analysts say, was a double-squeeze.

Banks cut back on lending to developers and home buyers alike as the People’s Bank of China lifted the ratio of deposits that must be set must aside as reserves. Additional measures saw tightened mortgage lending to second-home buyers and new rules that block developers from using bank loans to finance land purchases. The government also tightened controls over the banking system to make it more difficult for developers to use funds from presales of projects to aid expansion.

Funding from the stock market dried up as regulators delayed listing approvals in a bid to make it harder to raise capital. Companies have effectively been shutout from fund raising on bond and equity markets since markets in Hong Kong and China peaked last October.

Life, indeed, for the developer without access to funds is far from grand. China’s real estate markets may have missed the massive declines seen elsewhere around the globe, but conditions in its 70 major cities have cooled sharply since the fourth quarter.

Vanke, in the story above, is one of the major companies which can easily weather this slight storm. But even Vanke will be giving an extra-careful evaluation of each new project.
Source: MarketWatch

Discounts and other incentives are being used to fight shrinking sales of property.

Vanke, the largest developer on the mainland by assets, announced an across-the-board discount of over 5% for 10 of its properties in Shanghai. It is the first time the company offered such a large discount in the city. Vanke is offering even better terms for cash buyers. A sales clerk at one of the company’s offices said those paying the full amount at once will get as much as an 8% discount.

Industry insiders said such a strong promotional offer by a major developer in the city indicates the market will continue to be bleak in the months to come.

Chen Sheng, director of China Real Estate Index System, said many other real estate developers may follow Vanke’s example by offering more discounts.

Shanghai-based Jing Rui Properties has also lowered its prices by offering a 3% discount for group purchases and a 2% discount for those recommended by previous buyers.
Hopson Development, a Hong Kong-listed real estate firm, picked out several apartments for sales promotion in Beijing, cutting down prices from RMB30,000 per sq m to RMB22,500 per sq m.
A project developed by Beijing-based Huayuan Real Estate is offering over 7% discount for those buying small apartments.
Coastal Greenland group, also a Hong Kong developer, reduced its prices for new projects in Beijing, lowering them by around RMB400 per sq m from the average of RMB17,000 per sq m.

Industry analysts said a number of large developers are trying to sell quickly and then take over other projects and smaller developers when the market dives. Some of them, however, are eager to sell off their projects to improve their annual reports.

Zhang Lei, a marketing professional with a developer that has several high-end projects going in Beijing, said, ‘Sales of high-end projects will face a big challenge this year as most buyers are investment-oriented.’
Source: China Daily

As China’s government attempts to cool property prices with limits on lending, developers are in a land grab. The National Bureau of Statistics said Li Ka-shing, who made his fortune in Hong Kong real estate, Chinese billionaire Xu Rongmao (seen in our illustration), who owns Shimao Property, and hundreds of local developers boosted investment 29% in the first eight months of 2007.

Eugene Kim, chief investment officer of Hong Kong-based Tribridge Investment Partners, a $200 million hedge fund, came up with a cheery view: ‘If the government decides to impose further restrictions, most if not all of the developers will go bankrupt, depending on the severity of the restrictions. That makes us very selective in terms of which bonds we buy and the spreads we require to compensate for risk.’

According to a National Development and Reform Commission survey home prices in Shenzhen were 18.6% higher in November than a year earlier. In Beijing the rise was 14.9% and in Beihai, in Guangxi province, 16.4%.

The People’s Bank of China last month raised its benchmark one-year lending rate to a nine-year high and increased reserve requirements to the highest it has been since 1998. In September the government increased the minimum down payments on apartments from 30% to 40%.

Signs of a reaction have started to appear. The nation’s largest publicly traded developer, Shenzhen-based China Vanke, sold property worth RMB4.23 billion ($582 million) in November, 18% less than in October.

Clara Lau, an analyst at Moody’s Investors Service in Hong Kong, said Chinese developers are among the most vulnerable of any group in Asia to downgrades because a slowdown in home sales would deplete cash.

She explained the rush to buy land: ‘They have been growing aggressively, with the view that if they don’t buy now, it will be more expensive for them later.’
Source: Bloomberg

This is changing into a game for the well-stacked companies which can draw on serious reserves. Many of Shanghai’s small and medium-sized property developers are seeking to be merged or acquired because they do not have the capital and land reserves needed now that the government has released tightening policies to cool down the market.

According to statistics from the Shanghai United Asset and Equity Exchange (SUAEE), 13 real estate developers have registered to sell all or part of their stakes since the end of September, with the total reaching RMB720 million(US$96.51 million).

Mainly this is because you now need plenty of capitl — and, better still, a lot of land reserves — to stay in the game. Some small and medium-sized developers find it more difficult to get land from the government for business development, compared with the large State-owned developers. Again, this is understandable if not exactly praiseworthy.

Meanwhile, many large-scale real estate developers smell potential bargains in the air and are on the hunt for merger and acquisition (M&A) opportunities.

China Vanke bought a 50% stake in Shanghai Dijie Real Estate for RMB2 billion in September, after it had acquire three million sq m of land in Shanghai from other developers like Evergrande Real Estate Group.
Shanghai Industrial Holdings acquired a 19% stake in Shanghai Urban Development for RMB1.57 billion in October to become the company’s major shareholder.

Merger and acquiitions will increase in tempa as the goverment restrictions seriously start to bite.
Source: China Daily

China’s Ministry of Finance has reported a startling 95.5% jump in the profits of state-owned real estate sector in the first nine months of this year.

The leading state-owned property company, Poly Real Estate Group, has reported a revenue of RMB39 billion, and its net profits has risen 83.27% to RMB562 million yuan in the first quarter.
China Vanke collected RMB1.8 billion net profits in the first half.

The State Bureau of Statistics reported a 8.2% increase in house prices of 70 large and medium-sized Chinese cities in August compared with last year.

Other state-owned real estate developers enjoying the property boom include China National Real Estate Development Group Corporation, China OCT and COFCO Property.

China’s state-owned enterprises (SOEs) reported RMB1.2 trillion in profits in the first three quarters, a 31.2% increase over the same period last year.
Source: People’s Daily Online