China Real Estate: Something Which Caught My Attention29 August, 2011, 15:48. Posted by Zarathustra
Tags: Greentown, Real Estate
Despite the official data suggesting that home prices aren’t really falling much, there are something rather more interesting that I have been reading and hearing for a while now.
Since probably a month or two ago (or perhaps longer?), there are various reports suggesting that prices in the primary residential market are getting cheaper than secondary residential market, i.e. new homes are getting cheaper than second-hand properties. This was particularly true for those in the fringe areas of big cities, but there are more and more such anecdotes in more and more cities. Apple Daily in Hong Kong points out that the phenomenon is getting more widespread in cities like Beijing, Shenzhen, Shanghai, and Guangzhou, and in other second-tier cities like Tianjin, Chongqing, Wuhan, Ningbo, etc. This is not very usual, but that is pointing to something rather more ominous. In the meantime, unsold flats in Beijing (including flats available for pre-sale and completed flats) amounted to 108,181 units according to Xinhua. Aggressive administrative measures have taken the steam out of the market, leading to low transaction volume and accumulating unsold inventories even though prices aren’t moving very much, even with increases in some places.
So some primary market prices are now lower than secondary market prices, while prices hikes can still be seen in some places (which is somewhat inconsistent). Significant corrections are still not really happening. The question is for how much longer can this be held. Early on, I suggested that it might be useful for look at how real estate developersare doing in such an environment where credits are somewhat harder to obtain both for them as well as for buyers, and with aggressive administrative measures taking transaction volume out. The general picture is that inventories are rising, with some deterioration in profits (to be fair, some are still rising) and increase in debts. The latest one is Greentown (3900.HK), which reported their first-half result yesterday. Despite a 169% in net profit in the first half compared to the second half of 2010, the cash balance of Greentown decreased by 45.6% compared to the end of last year. Without the statement of cash flow, it is not quite so immediately clear why the company managed to lose almost half of its cash in 6 months, but it is certainly something interesting to note and to be kept in the back of your head. And if this continues and if this happens to more developers, they will eventually feel the pressure to boost cash flow by cutting prices in order to increase sales volume.
On the whole, the view here remains largely negative due to high inventories level as a result of aggressive administrative measures as well as credit tightening. A significant correction may happen, but the timing of it is rather more difficult to pinpoint.