Identifier
Created
Classification
Origin
09SHANGHAI105
2009-03-04 10:28:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Shanghai
Cable title:  

(SBU) YANGTZE RIVER DELTA PROPERTY DEVELOPERS FEELING THE

Tags:  CH ECON EFIN PGOV 
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VZCZCXRO8932
RR RUEHCN RUEHGH
DE RUEHGH #0105/01 0631028
ZNR UUUUU ZZH
R 041028Z MAR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7698
INFO RUEHBJ/AMEMBASSY BEIJING 2572
RUEHCN/AMCONSUL CHENGDU 1794
RUEHGZ/AMCONSUL GUANGZHOU 0250
RUEHHK/AMCONSUL HONG KONG 1961
RUEHUL/AMEMBASSY SEOUL 0392
RUEHGH/AMCONSUL SHANGHAI 8332
RUEHSH/AMCONSUL SHENYANG 1785
RUEHIN/AIT TAIPEI 1582
RUEHKO/AMEMBASSY TOKYO 0567
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 04 SHANGHAI 000105 

SENSITIVE
SIPDIS

STATE FOR EAP/CM, DAS DAVIES
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA
NSC FOR LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
STATE PASS CFTC FOR OIA/GORLICK

E.O. 12958: N/A
TAGS: CH ECON EFIN PGOV
SUBJECT: (SBU) YANGTZE RIVER DELTA PROPERTY DEVELOPERS FEELING THE
DOWNTURN

REF: A. A. Shanghai 078

B. B. 08 Shanghai 558

UNCLAS SECTION 01 OF 04 SHANGHAI 000105

SENSITIVE
SIPDIS

STATE FOR EAP/CM, DAS DAVIES
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP
TREASURY FOR IMFP -- SOBEL/CUSHMAN
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA
NSC FOR LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
STATE PASS CFTC FOR OIA/GORLICK

E.O. 12958: N/A
TAGS: CH ECON EFIN PGOV
SUBJECT: (SBU) YANGTZE RIVER DELTA PROPERTY DEVELOPERS FEELING THE
DOWNTURN

REF: A. A. Shanghai 078

B. B. 08 Shanghai 558


1. (SBU) Summary. Prospective home buyers in the Yangtze River
Delta are holding off on home purchases for now, preferring to
wait on the sidelines in anticipation that home prices will
continue to fall, according to a wide range of Consulate
contacts Econoff spoke with in recent weeks. Banks, sensing
developers' increasingly fragile finances, are becoming more
cautious about lending to the real estate sector. Nonetheless,
developers, buoyed by hopes that the market will quickly
rebound, are loath to lower their prices, and instead are taking
ad hoc cost-cutting measures. Ultimately, property developers
assume that local governments will provide support for the
sector if the crunch becomes too severe. End summary.


2. (U) This is a third in a series of reports on the real
estate market in East China.

============================
Real Estate Demand Slumping Across the Yangtze River Delta
============================


3. (SBU) Prospective home buyers in the Yangtze River Delta are
holding off on home purchases for now, preferring to wait on the
sidelines in anticipation that home prices will continue to
fall. Lin Fu, Chairman of the Board, Bank of Nanjing, said on
January 21 that consumers have trained themselves to "make
purchases when prices are rising, not when they are falling"
(mai3zhang3 bu4mai3 die1). Real estate trading volume hit a low
in October, according to the contacts, as confirmed by
transaction data collected by Soufun and available through CEIC.
Shanghai, for instance, peaked at above 3 million square meters
of property sold in September 2007, but registered less than 1
million in October 2008; Hangzhou (downtown) peaked at almost
700,000 square meters in June 2007, and reached only 150,000
square meters in October 2008.


4. (SBU) The shortfall in demand, in theory, should be leading
to price declines that bring the market back into equilibrium.

However, developers, buoyed by hopes that the market will
quickly rebound, are loath to lower their prices, according to
our interlocutors. In addition, contacts say that developers
are being warned by local governments not to cut selling prices,
since this can lead to discontent among recent buyers who paid
the higher price (ref. B). Therefore, indexes of nominal prices
show only marginal housing price declines: Soufun.com's China
Real Estate Index (ref. A) shows drops of only 1 to 3 percent in
recent months for major cities in the Shanghai consular
district.

============================
Falling Land Prices are Impacting Government Revenues
============================


5. (SBU) Land prices, on the other hand, have been impacted.
For instance, Nanjing was planning to sell 9 million square
meters of land in 2008, but in the end property developers
bought 5 million, said Chen Xinghai, who is chairwoman of Xixia
Construction Company, one of Nanjing's top three property
developers, and who also leads the local property developers'
association. According to figures from Centaline, one of
China's leading mid-tier property agencies, the auction failure
rate in 2008 reached 30 percent in Shanghai, 50 percent in
Hangzhou, and 60 percent in Nanjing. (Note: The Nanjing figure
varies from that provided by Xixia's Chen. End note.) For
instance, land prices in Shanghai have fallen from over RMB3,000
per square meter at their peak in 2004, to under RMB2,000 per
square meter in 2008, according to figures compiled by Centaline
and DBS Vickers.


6. (SBU) The slow down in land sales--and to a lesser extent,
the slowdown in transaction taxes on real estate--will lead to

SHANGHAI 00000105 002 OF 004


lower government revenues, our interlocutors said. Xixia's Chen
said that Nanjing obtained off-budget revenues of RMB10 billion
(approximately US$ 1.5 billion) from land sales in 2008; the
corporate banking chief of Bank of China, Jiangsu Branch, said
this represents a fall 20 percent from the 2007 level. In
addition, on-budget taxes from real estate amounted to 30
percent to 40 percent of Nanjing's fiscal income, said Chen. In
Ningbo, much of local government income comes from land sales,
claimed Soufun Ningbo General Manager You Yangbin and Ningbo
Haipu Real Estate Agency General Manager Wang Xiaoyun.

============================
Real Estate Financing Sources are Getting Scarcer
============================


8. (SBU) Some property developers may start to experience
liquidity problems as banks and other finance sources become
less generous, while revenue inflows from purchases stall.
Xixia's Chen said that banks are only willing to lend to the top
100 enterprises now, and since Xixia is the third-largest
property developer in Nanjing, it faces fewer problems. An
associate director of Prax Capital, a Shanghai-based private
equity firm with a real estate fund, said that small developers
seem to have fewer troubles, as they have less capital needs and
can rely on local governments. However, said our interlocutor,
medium-size developers may have greater difficulties funding
themselves as the industry moves toward consolidation; among the
large property developers, those who were not able to list
before the stock market downturn now will be unable to raise
equity, and therefore have the most fragile finances.


9. (SBU) A project director of Centaline Ningbo said that in the
Ningbo market, local property developers work together to
overcome liquidity problems. If one is short capital, the
others will extend the needed financing. However, this network
is not open to the national property developers that have
entered the Ningbo market, said Zhang, such as Greentown. He
laughed when recalling how these national operators were
sometimes frozen out of the market, as when a company
representative from nationally known Vanke once asked how a
local property developer was selling many units in one building,
while buyers passed over Vanke's building next door.


10. (SBU) A Nanjing bank typifies the wariness that emerges in
conversations with East China bankers about the real estate
sector. Sheng Hong, Assistant Executive President, Nanjing
Branch, China Everbright Bank, described how three years ago
Everbright's head office in Beijing had instructed all branches
that home mortgages were to be treated cautiously, with mortgage
lending going forward only after approval from Beijing. Of
particular concern, said Sheng, are "fake mortgages" (xu1jia3
dai4kuan3) in which the property developer will get friends and
relatives to take out mortgages on units in the developer's
projects so the developer can use the revenue as operating
capital, with the developer promising to repay the fake
mortgages once sales to actual purchasers begins. In addition,
Everbright has an internal rule that banks must move to
foreclose on developers who have not sold completed apartments
within four months.

============================
Property Developers Affected by Land Bank, Corporate Structure
============================


11. (SBU) A key variable for property developers' ability to
wait out current market conditions is when they purchased the
land they are building on. As Nanjing urban studies professor
Zhang Hongyan explained, real estate prices may be lower than
their peak, but they are still higher than the cost of land and
materials, since housing costs have risen so rapidly in recent
years, so property developers are not necessarily directly
impacted. However, as the Centaline Ningbo's project manager

SHANGHAI 00000105 003 OF 004


explains, projects on land purchased in Ningbo in the early
2000's will remain profitable, but those built on land purchased
when land prices peaked in 2007 will have difficulties. Ni
Biao, real estate company office manager of Youngor, one of
Ningbo's leading property developers, confirmed this, saying
that a only a 10 percent drop in property prices would
substantially impact projects on land purchased in the past
three years, while projects on land purchased before that could
absorb a 20 percent drop in property prices.


12. (SBU) A company like Youngor may face other difficulties
raised by its corporate structure. Pressure to maintain
companies' property sales prices, and therefore the
profitability of the real estate unit, are higher as the slowing
internal and external markets hits the companies' core apparel
business, implied Youngor's Ni. Real estate typically makes up
40 percent of the profits for the Youngor Group, said Ni, but in
2008 Youngor met only around 70 percent of its sales targets.

============================
Local Governments Assumed to Offer Bail Outs
============================


13. (SBU) Contacts in the real estate industry were unanimous
in assuming that the local governments would provide support for
the sector if the crunch on property developers becomes too
severe. "The authorities won't wait for the real estate
industry to die," Xixia's Chen bluntly stated. Youngor's Ni
said that the government would step in because of the industry's
leading role in sustaining a variety of upstream and downstream
sectors. Ni commented that Hangzhou in December 2008 already
launched a "large-scale rescue" of the local real estate sector,
since the property investment bubble and subsequent downturn
were more severe there than in Ningbo.


14. (SBU) Governments could offer supports in a variety of
ways, said our interlocutors. Banks will be encouraged to roll
over loans, agreed Youngor's Ni and Zhan Rongsheng, a top
researcher with the Ningbo Development and Reform Commission--Ni
said that the government would want to forestall social
instability that could originate in a real estate collapse. The
Bank of China manager said that his bank already was
anticipating rolling over much of the 30 percent of their
lending book that is in the real estate sector. The local
government will also offer flexibility on the deadline by which
property developers have to begin construction on land they have
purchased, said Ni and Ningbo Centaline's project manager.
Xixia's Chen cited the high-speed rail network planned to link
Nanjing, Hangzhou, and Shanghai as potentially supporting
commuters who wish to buy homes in Suzhou and work in Shanghai.


15. (SBU) Interlocutors stated that a drop of 30 percent
overall in the real estate market would trigger a government
bailout in a given locality. Yang Xiaoping, Director of the
China Banking Regulatory Commission (CBRC),Zhejiang Office,
told Econoff that since most buyers put 30 percent down on their
mortgages, banks could sustain a drop in market value of that
scale; Sheng Cheng, vice director of the China Real Estate
Index System, based in Shanghai, independently suggested a
similar scenario. However, the view was not unanimous: the
Bank of China manager said that Nanjing performed a stress test
this past fall at the behest of the CBRC head office, and that
only two or three banks would be significantly impacted by a 30
percent fall in the local real estate market.

============================
Property Developers Experimenting with Stop Gaps
============================


16. (SBU) Property developers are taking other steps to
increase sales or hoard cash during the downturn, said our
contacts. Vanke, for instance, was willing in early in 2008 to

SHANGHAI 00000105 004 OF 004


begin cutting prices on unsold units in its developments,
despite the wrath of previous customers (ref. B). Youngor's Ni
said that the company may reduce prices by 10 percent. In
addition, Vanke and Youngor--the latter having properties in
relatively large second-tier cities such as Suzhou and Hangzhou,
as well as third-tier cities such as Zhejiang's Taizhou and
Shaoxing--are cutting the quality of fixtures and adding in
extras such as garages or storage space to make price cuts less
transparent, said Ningbo Centaline's project manager and Soufun
Ningbo's You.


17. (SBU) Property developers are also delaying projects.
Youngor is putting off 100,000 square meters of construction
originally planned for 2009, amounting to one-third of its 2008
construction, said Ni. Xixia's Chen said that her company was
dropping half of its planned construction this year, and that
Vanke was decreasing its rate of units constructed by 30
percent.

============================
Comment
============================


18. (SBU) Property developers in East China are concerned
Beijing is signaling that the real estate market should fall
further to make housing more affordable. One example our
interlocutors cite is the Chinese Academy of Social Sciences
Blue Book on the China economy, released in December 2008, which
said that real estate prices would continue to fall. A second
is the rejection of the property sector as one of the ten
sectors given national support plans by the State Council, a
decision made final in the last week of February 2009.
However, in East China these suggestions are falling on deaf
ears. Property developers are generally confident they can gain
the support of local governments should the downturn continue.
Given the impact of the sector on local finances, the developers
will have a solid opportunity to make their case.
CAMP