Protests Over Developer Discounts Bring Out the SWAT Team in Zhejiang

Eastern China’s Zhejiang province could be in for more trouble as the SWAT team was called in to calm protests that erupted in the city of Taizhou after property developers began discounting home prices by 30 percent late last month.

Taizhou is about 180 kilometres (112 miles) south of Ningbo, where Zhejiang Xingrun Real Estate collapsed last month, and the city’s struggles help illustrate the bind that many developers find themselves in as prices slide and potential buyers sit on the sidelines.

According to a story in the Australian Financial Review, crowds of angry customers estimated at 100 people began protesting at the Taizhou sales office of Hangzhou New Century Real Estate (which also goes by the name Hangzhou Kaiyuan Real Estate Group Co., Ltd) after the developer suddenly announced a 30 percent discount to clear 300 unsold units in its Noble Garden development in the city. The company is a subsidiary of New Century Tourism Group, which describes itself as China’s biggest privately owned hotel group.

Photos from the Weibo accounts of local citizens show police SWAT team members guarding the sales office after earlier buyers, many of whom had paid full price for apartments in the project up to two years earlier started showing up to demand refunds. Since then New Century reportedly has had to surround the office with armed guards.

Now with guards lining the outside of the office and occupying every seat inside, the developer has little chance of creating cashflow for the project even after discounting.

Zhejiang as the Epicentre of China Housing Crisis

Taizhou’s location in Zhejiang puts it near the centre of China developer discounting activity. The fourth-tier city of approximately 5 million people sits roughly half-way between Ningbo, where Zhejiang Xingrun collapsed under the weight of RMB 3.5 billion in debts, and Wenzhou, which has led the slide in China’s housing prices with more than 30 months of straight decreases in home prices.

Now buyers in New Century’s Noble Garden find that homes purchased two years ago are now worth less than what they paid for them, even before they are able to move in.

In Hangzhou, the capital of Zhejiang province, there were already reports of discounting in February, and the city government met with developers last month to discuss ways to boost the slumping property market.

Oversupply Concentrated in Smaller Cities

For cities such as Taizhou, the situation is likely to be more dire than for provincial centres such as Hangzhou, as recent studies estimate that China is facing an oversupply of housing particularly in smaller cities.

According to a recent market report by Japanese securities firm Nomura, the amount of housing in China has been increasing rapidly.

We estimate residential floor space per registered urban resident may have reached 37 square meters by 2013, compared to 35 in Japan and 33 in UK. If the current trend holds, it will reach 51 square meters by 2017. Official data show inventory has risen by 182% from 2009 to 2013, yet land sales suggest that supply is set to rise quickly in coming years.”

And of the projects that comprise this rise in floor space per capita, Nomura clarifies that the majority of this building is going on away from the first-tier cities.

The four first-tier cities (Beijing, Shanghai, Guangzhou and Shenzhen) accounted for only 5% of housing under construction and sales (both in square meter terms) and 8% of housing investment in 2013 (in RMB terms). The 24 second-tier cities (mostly provincial capitals) only accounted for 28% of housing under construction, 27% of housing sales and 35% of housing investment. The remainder, a large number of third- and fourth-tier cities, comprised 67% of housing under construction, 69% of sales and 57% of housing investment.”

Buyers and Sellers Both in Difficult Situations

While buyers may now find themselves having purchased homes that are already worth less than the amount they owe the banks, developers are also facing challenges.

Real estate companies in China typically rely on cash from pre-sales to complete projects, and with buyers hesitant to make purchases in a declining market, some lack the cash necessary to complete projects such as Noble Garden. And if discount programs continue to lead to protests then developer cashflow could get tighter still.

For New Century, which has projects in 25 cities across China, the company’s three developments currently under construction in Taizhou, comprising nearly 5000 apartments and villas, could be its most challenging yet.

 Photos courtesy of Sina Weibo.