By Hu Yuanyuan (China Daily)
Updated: 2008-02-25 12:57

One after another, major Chinese cities are reporting sluggish sales in their real estate markets, due primarily to the central bank's continual interest rate hikes and the following credit crunch.

For Zhang Qiang, a sales executive of Beijing Haolong Real Estate Company, the early weeks of 2008 have been especially cold - not because of the snow storm that hit the southern provinces, but the company's worrisome sales records.

It is the worst time in two years. "Before the spring festival, we barely managed to sell five apartments for one-time payments, at a pretty nice price for buyers," he says, "With that payment, we just got enough, 3 million yuan, to pay the salaries to our staff before the holiday season."

The company's project is about a half-hour walk from the Beijing International Trade Center, or Guomao. The average property price of the area is above 20,000 yuan ($2,797.2) per sq m.

"With such a favorable location, the houses sold quite well in the first nine months of 2007. However, sales dropped sharply in the fourth quarter, with more and more people taking a wait-and-see attitude," Zhang says.

Because of the government's policies to cool down the sizzling property market, especially increasing the down payment to 40 percent for a second apartment, many potential buyers have postponed their home purchase plan. Since the last quarter of 2007, major Chinese cities have actually seen sales and prices plummet in the property market.

Shenzhen was the first to feel the pinch. Sales of pre-owned houses in the southern city fell 36.8 percent in September, with prices dropping as much as 47.1 percent compared with August. New houses went for an average 14,797 yuan per sq m in the city in October, a 10 percent drop from September.

Shanghai's property market, too, has cooled down since mid-November, dropping 50 percent from the first half of last year to below 600 apartments in November, according to the China Real Estate Index System.

Beijing municipal construction committee statistics show the average price of 45 new residential buildings dropped 358 yuan to 14,966 yuan per sq m in November, the first time the capital's property market fell in six months. More and more property projects are offering discounts or other sales promotions.

Shrinking sales and the government's tightening of property finances have substantially squeezed their cash flow. "We are still struggling to pull through, hoping the market will warm up in the second quarter of this year," says Zhang. "However, if this 'winter' is too long, we may have to sell the project to bigger developers."

M&As galore

"The year 2008 will be a difficult time for medium and small property developers, and there will be more mergers and acquisitions in the industry," says Quan Zhong, chairman of CHANGE, a Shanghai-based real estate services provider. Statistics show there are around 30,000 real estate enterprises in the country, leaving much room for a reordering of the sector, Quan adds.

In December, Shanghai Forte Land Co Ltd said in a statement to the Hong Kong stock exchange that the company had spent 970 million yuan in taking a 40 percent stake of Wonderful World Town, a 1.1 million sq m project in Shanghai's Pudong area, making it the largest acquisition by Forte ever. The remaining 60 percent went to Vanke, the country's largest property developer.

Sino-Ocean Land, a Beijing-headquartered property company, is also reported to be considering acquiring Shenzhen City Construction Investment Development Co Ltd. Li Ming, chairman of Sino-Ocean Land, tells China Business Weekly that around 40 percent of the company's land bank was achieved through merger and acquisition. "And we are going to increase our land bank from 8.6 million sq m to 18.6 million sq m within a year, still largely relying on M&As."

Both capital and land are the driving forces for growing M&As in the real estate sector. As land supply shrinks, the bids in public auctions are rising. Acquiring developers and project equity have thus become a more economical mode of gaining land. On the other hand, enterprises that have land but lack the capital to develop it are also seeking buyers as the government has the right to reclaim land that hasn't been developed within two years.

Meanwhile, M&As between foreign players and local developers are also speeding up.

"Because of the government's more restrictive policy on foreign investors' entry into the property market, many of them, especially the newcomers, would like to join forces with local players," says Eric Chan, deputy managing director of Savills (Beijing branch), a UK real estate service provider.

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