SOUTHWEST CHINA'S REAL ESTATE CONTINUES PRE-QUAKE SLIDE

UNCLAS SECTION 01 OF 02 CHENGDU 000241 SENSITIVE SIPDIS DEPT FOR EAP/CM E.O. 12958: N/A TAGS: ECON ELAB CH SUBJECT: SOUTHWEST CHINA'S REAL ESTATE CONTINUES PRE-QUAKE SLIDE CHENGDU 00000241 001.2 OF 002 ¶1. (U) This cable contains sensitive but unclassified information - not for distribution on the internet. ¶2. (SBU) Summary: Land prices and housing prices in Chengdu and Chongqing, two major cities in southwest China, have been declining since late last year as government regulations have made buying second homes more difficult. Newly-built housing is routinely being advertised for 25 - 33 percent below the original sale price. Residential land prices in Chengdu have also fallen by half or more. Some developers in Chongqing are working with the local government to ride out the real estate downturn. In contrast, developers in Chengdu who have seen substantial depreciation of their undeveloped land are reportedly forfeiting deposits and returning the property to the local government. The Sichuan earthquake itself has apparently not had a significant effect on real estate prices. End summary. A Downward Trend in the Market -------------- ¶3. (SBU) Contacts in Chengdu and Chongqing recently told Congenoff that land prices in both cities started declining in October 2007. Che Yong, the chairman of a Chengdu-based real estate firm, said that in some areas prices for land in the city had declined by 50 - 66 percent over the past year. David Wong, the managing director of a real estate firm in Chongqing, also saw land prices declining in Chongqing. He said that the declines were not as great as those in Chengdu, but he did not quantify the reduction in value. ¶4. (SBU) Che and Wong both noted that new and existing home prices in their respective cities had declined over the last year, leading to many special offers by builders. Advertisements in a major Chongqing newspaper, Chongqing Commerce News (Chongqing Shangbao),offered additional square footage at no additional cost or rebates of up to 25 percent of the sale price that could be used for furnishing and decorating. In a major Chengdu newspaper, Western Municipal News (Huaxi Dushi Bao),a builder offered 33 percent discounts in late October 2008, while another offered three bedroom houses for the price of two. Wong and Che also said that in addition to price cuts on newly-constructed homes, the prices of existing homes were also declining. 
 Tighter Regulations, Not Quake, Depress Real Estate Sales -------------- -------------- ¶5. (SBU) Central government regulations making it more difficult to buy a second home were cited by both Che and Wong as an important factor in the declining price of housing. In September 2007, Beijing implemented regulations that increased the down payment requirements and interest rates on loans for the purchase of second homes. Government officials at the Chengdu Real Estate Transaction Center (CRETC) said in mid-October of this year that the measures were intended to reduce the speculative inflows of money from outside the city. None of the real estate experts we interviewed, however, believed that the 12 May earthquake in Sichuan had played a significant role in the declining price for newly-built homes. ¶6. (SBU) Existing home prices are suffering because of financing requirements as well. Buyers of a previously purchased home can only finance 70 percent of the value of the home, as opposed to 80 percent for new construction, according to Wong. Buyers may also receive higher interest rates on loans for existing houses, further reducing incentives to buy older homes. Che said that about 85 percent of home buyers in Chengdu rely on bank loans to purchase a home. Reaction from Developers CHENGDU 00000241 002.2 OF 002 -------------- ¶7. (SBU) In Chengdu, Che said that developers who purchased land at elevated prices have subsequently seen a significant loss of market value. Some developers are simply walking away from the property and forfeiting deposits paid to purchase the land rather than start construction and risk uncertain financial returns on their investments. In these instances, the land returns to the government. Wong said that the Chongqing government is working with developers to help them to hold on to their property. Chongqing is providing extended repayment terms for developers who are unlikely to realize profit on their investment over the next 2-3 years. Wong did not provide specific examples of how this is being done. ¶8. (SBU) Developers are also looking to joint venture partners to obtain the capital needed for development. Developers are prohibited from using land as collateral for construction loans, even if the land is wholly owned by the developer, said Wong. The Road Ahead for Chongqing and Chengdu -------------- -------------- ¶9. (SBU) Che said he was pessimistic about the outlook for the Chengdu housing market over the next 3-5 years. He noted that global economic conditions would certainly have a negative impact on Chengdu's real estate sector. Officials at CRETC also suggested that the housing market might decline further, although they did not say when the market might bottom out. Declining land and home prices could also squeeze local government budgets. Both CRETC and Wong said that housing is an important source of local government revenues. Property-related taxes account for about 25 percent of Chongqing's revenue, according to Wong. The owner-occupancy rate is another factor that may affect the outlook for real estate in these two cities. Chongqing housing is 90 percent owner-occupied, but the rate in Chengdu is only 54 percent, according to Wong. ¶10. (SBU) Comments: Real estate and related development projects have played a notable role in the economies of Chengdu and Chongqing in recent years. In addition to serving as a source of employment for thousands of laborers from neighboring rural areas, the real estate sector has brought in foreign investment as well. For example, we understand that Singapore firms have invested almost USD 600 million in real estate and commercial development projects in Chengdu. For local officials, some of whom have openly expressed their concerns to us about potential problems caused by unemployed Sichuan and Chongqing workers returning home from coastal factories, problems in the real estate sector are a very unwelcome headache. BOUGHNER