China Now Feeling the Real Estate Crackdown

As we all know falling home sales are a particular threat to developers, who typically rely heavily on cash from the sale of unfinished projects to pay for operations and expand. A credit crunch, dwindling transactions and falling prices in some hot markets are adding up to trouble for the Chinese real estate industry. It is known that although official figures show investment in property rose 32 percent in the first four months from a year earlier, developers are worried as bank loans dry up and the cost of tapping other sources of funds rises. Which is being a major concern globally now.

Yang Junfang, deputy head of strategic investment for Xinyuan Real Estate, said at a property forum last week that "Our strategy now is to safeguard our cash flow," and added "We're taking a more conservative view of the future." The situation is making bank regulators and analysts nervous that a new crop of bad property loans is on the way.

Charlene Chu at Fitch Ratings in Beijing “It's one of our biggest concerns, but we don't see a manifestation of that in the quality of loan portfolios yet." according to the China Index Academy, which is affiliated with SouFun.com, a leading real estate Web site, the number of residential transactions in Beijing fell 13.7 percent in April from March and was down 56.4 percent from a year earlier.

Prospective buyers have come to look at the apartment over the past two months, but no one has made an offer. Liu Juan and her husband have been trying in vain to sell their Beijing apartment and move into a larger one, "Everyone seems to be looking instead of buying right now," she said. China does not publish data on nationwide sales. But it compiles a property outlook index on the state of the market. The index has been falling since reaching a peak in November.

The China Index Academy survey reported, "Some cities have seen significant falls in real estate transactions, especially since the end of 2007, which poses risks to the short-term operations of listed firms that cannot be overlooked." The survey showed that the liabilities of locally listed Chinese developers reached 76.5 percent of their assets at the end of last year, up from 69.1 percent at the end of 2006. The 70 percent mark is seen as a warning level. And while average property prices in 70 cities were up 10.1 percent in April from a year earlier, prices have declined on a monthly basis in the prosperous Pearl River Delta region of southern China, especially in Shenzhen.

Zhong Wei, an economics professor at Beijing Normal University, said, "I tend to believe that property prices in cities like Beijing, Shanghai and Hangzhou will enter an adjustment phase in the last two quarters of this year." Chinese developers are trying hard to improve their capital base. Many are trying to team up with international funds, which are now able to drive a harder bargain. Before October, when the credit crunch worsened, the shoe was on the other foot.