Zhejiang Developers Now Guaranteeing That Prices Will Go Up

The problem with China’s real estate market in 2014 is confidence, and whether there is too much confidence or not enough of it may depend upon which side of a deal you are sitting on.

Developers in Zhejiang – one of the provinces hit hardest by this year’s property downturn – are so confident that the market will soon recover, that they are guaranteeing future prices to potential buyers, according to a Bloomberg story published today.

Shanghai-based Shanheng Real Estate Group is offering to buy back homes in five years’ time at a 40 percent markup for buyers in a Hangzhou project, while Zhejiang-based DoThink Group is offering a 20 percent markup over a three year term on home sales in Wenzhou.

Zhejiang Home Market’s Confidence Problem

DoThink is making the guarantee to potential buyers by having its private-equity arm, Kylin Investment Management offer to buy the apartments back at the 20 percent markup, for qualifying purchases.

Kylin CEO Huang Dong was quoted by Bloomberg on how he thinks his firm may have the housing crisis figured out. “Many developers have tried various marketing methods to get cash back, but they all missed the root cause” of falling home sales, Huang Dong told Bloomberg. “The key is lack of confidence and the uncertain outlook.”

Given the recent performance of the Wenzhou market where DoThink and Kylin are making their buyback offer, the confidence problem might be the developer’s confidence surfeit, as much as any confidence deficit on the part of potential buyers.

During May housing prices in Wenzhou fell 4.4 percent compared to the previous month, according to the National Bureau of Statistics. Home costs have now been falling steadily in Wenzhou for more than two years and are down more than 35 percent from their peak in 2011.

In February this year, DoThink was already among the first developers in Hangzhou to begin discounting new home sales, as builders in the city have struggled with rapidly dropping demand for housing.

Five Year Buy Back Plan

While DoThink’s price guarantee strategy may appear risky, that doesn’t mean other developers won’t try it as part of an attempt to rekindle demand. Shanheng real estate was said in the Bloomberg story to have attracted more than 1,000 interested customers to a project in suburban Hangzhou last month, after promising to buy the units back at a 40 percent markup in five years time.

The company said that it sold 50 of the 100 homes that it made available under the plan.

Average home prices in Hangzhou fell 2.1 percent in June compared to May, according to a recent survey, marking an even sharper slide than the 0.7 percent drop the city recorded in May from April.

Late last month another Hangzhou developer collapsed and its owner was arrested for fraud after apparently betting the wrong way on the city’s once-booming residential real estate market and running up RMB 2 billion in debts.

Up the road from Hangzhou in Ningbo, Shenzhen-listed developer Yinyi Real Estate (SZSE: 000981) announced in early June that it would purchase a 70 percent stake in a cross-town rival for as much as RMB 950 million (US$151.9 million), as the province’s real estate industry comes under pressure to consolidate.

In May, Hangzhou-based Greentown China was forced to sell out to Tianjin’s Sunac after the Hong Kong-listed firm built too many homes in Wenzhou, Hangzhou and other Zhejiang cities.