Reports of a bubble in China’s real estate industry are on the rise this week as developers in Hangzhou and Changzhou have begun discounting homes to improve cashflow.
Discounts of as much as 36 percent for two projects in prosperous eastern China come amid a slide in home prices and credit clampdown that already have made analysts nervous about a potential sudden downturn in the industry.
A story in the Wall Street Journal indicated that,
Developer DoThink Group last week said it cut prices by 12.2% at its North Sea Park project in Hangzhou from to 15,800 yuan ($2,592) per square meter from 18,000 yuan per square meter.
According to data released by the National Bureau of Statistics this week, average home prices in Hangzhou fell during January for the first time since 2012.
DoThink explained its price cuts as cash-flow move designed to bring in revenue necessary to fund new land purchases. Land prices have risen sharply in China’s larger cities in recent months as the nation’s developers compete to secure projects in wealthy areas and investments in emerging cities have begun to be seen as too risky.
Changzhou Project Discounting by 36 Percent
In addition to the Hangzhou case, a project partially owned by Agile Property Holdings in the rapidly growing city of Changzhou in eastern China’s Jiangsu province also has begun discounting.
The Journal reported that,
Prices (for the development) were reduced to an average of 7,000 yuan per square meter, with some units selling for 5,380 yuan per square meter, down from a 11,000 yuan price tag in December last year, according to data from property broker SouFun Holdings.
Hong Kong-listed Agile is a well-known developer in China, and Changzhou has been seen as an up-and-coming city in the dynamic Yangtze River Delta region.
Credit Crunch Could Lead to Further Discounting
Government policies to prevent a real estate bubble have put financial pressure on developers in recent months, particularly as rising land prices increase the cost of development.
The stream of low-cost credit that formerly fueled the industry has largely been cut off as state-run banks have tightened lending. The resulting flood of Chinese real estate company bonds on regional markets has led to some high yield offerings going unwanted as investors become saturated with offerings from China.
With land prices reaching record levels in first-tier markets and slowing transaction volumes for new home sales its likely that more developers may face pressure to discount in order to raise the cash for new land purchases.
The potential for discounting amidst rising costs has some analyst raising concerns of a downward spiral for developers.