Chinese developers see market deterioration

Via FTAlphaville comes a useful survey of small developers in lower tier cities:

More than half of the 30 developers we surveyed in June-July 2014 (Phase 10 of our survey – see page 10 for a timeline) reported no change in the scale of their construction activity during the previous three months. Five reported less activity, up from two in our previous Phase 9 survey (Figure 1, this section). In the next three months, eight said they would build more, down from 15 in Phase 9 (Figure 2). The number reporting that they were seeing peers slow building activity continued to rise in the latest survey, to 24 out of 30 (Figure 3). The amount of land that developers have under construction is also down (Figure 4).

Why the deceleration in construction? Our surveyed developers believe the market is in the doldrums, sales are stagnant, and the near-term outlook is not good. Some also noted rising financing costs (on which more below). Even those that had increased their construction activity cited rising financing and land costs as a concern.

The number of land parcels released by city governments is falling, according to our developers. 13 of our respondents reported less land being released for sale in the previous three months and seven reported a lot less – much higher numbers than in recent phases of the survey (Figure 1, this section). Developers’ appetite for buying land has also ebbed: 16 developers reported that their local peers had become less keen on buying, up from six in Phase 8 (Figure 2).

21 of our 30 surveyed developers said they did not intend to buy any land in the next three to six months, continuing the recent trend (Figure 3).

Land price growth has slowed. 13 developers reported flat land prices and seven reported declines of up to 10% in the previous three months. The developers say they expect prices to remain flat in the next one to two quarters (Figure 4).

Apartment sales are deteriorating, even with discounts. 18 of our developers said that they believed their peers’ sales had deteriorated (Figure 1, this section), the highest number since Phase 5 in early 2012. While 12 of the developers reported flat sales compared to three months earlier, 10 experienced a decline and five reported a 20- 30% drop (Figure 2). Our developers say that 39% of their projects launched this year have been sold, while the ratio is 50% for all projects they are still selling.

Purchase incentives are now widespread in the cities we surveyed. 17 developers reported that they believed 70-90% of their peers were offering such incentives (Figure 3), mostly price discounts, as well as gifts (such as home decoration, car parking spaces and furniture) and lower down-payment ratios. Even with these inducements, 16 developers said they were less confident than three months ago (Figure 4)…

Rising inventories are one of the biggest drags on the market. Eight developers reported that inventories of unsold apartments are falling in their cities, down from 11 in Phase 9, while 17 reported rising inventories (Figure 5). Nearly half of our developers expect inventories to rise, and 10 expect inventory building to accelerate (Figure 6)…

Apartment selling prices have moderated, according to our developers. We focus on the new home market. 18 of our 30 developers reported that other developers in their cities are offering discounts on newly launched projects to attract buyers – eight more than in Phase 9 (Figure 1). Among them, most are offering price cuts of up to 10%.

Echoing this, 11 of our surveyed developers reported offering price cuts of up to 10% in the past quarter, and three offered bigger discounts. However, the price outlook is stable. 14 of the 30 developers expect flat prices in the next quarter, while seven expect continued mild price moderation. None expect a material price correction (Figure 2). Most believe a reversal of market sentiment is more important than discounts in turning the market. A number of our developers argued that it does not matter how much they cut prices, buyers are still very cautious.

Financing conditions for developers have been tight in recent months. Instances of default still appear uncommon, but the situation is worsening, according to our developers. 22 respondents reported that they believed their peers were nervous or worried about their cash positions, eight more than in Phase 9. Four believe that if sales do not improve, bigger problems will emerge (Figure 1).

Defaults do not appear common, though: the majority of our respondents had not heard of any cases. Delays in payments to suppliers are more common than delays in payments to city government and creditors (Figure 2). Also, half of our respondents had heard of developers looking to sell land to raise cash, a higher ratio than in previous surveys.