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China Developers Offering Home Buybacks in Weakest Markets

China Property
China’s home sales slumped 10.2 percent in the first five months of this year from the same period a year earlier amid tight credit and an economic slowdown, reversing last year’s 27 percent jump. Photographer: Brent Lewin/Bloomberg

Property developers in two of China’s weakest housing markets are offering to buy back homes above the purchase price to boost sales as demand slows.

In Hangzhou, where home prices fell the most in May among 70 Chinese cities watched by the government, Shanheng Real Estate Group is giving homebuyers an option to sell back their apartments in five years for 40 percent above the purchase price. In Wenzhou, DoThink Group is offering to repurchase homes at three of its projects for 120 percent of the purchase price after three years.

The offers are the latest strategy by developers across China, including reducing prices, delaying project launches and offering incentives to potential buyers, as they seek to maintain sales targets. Prices of new homes fell in May from April in half the 70 cities tracked by the government, the largest proportion since May 2012, according to government data. A more persistent and sharper downturn in the property sector is the biggest risk for China’s economy in the next couple of years, according to UBS AG.

“Obviously they’re relatively cash-thirsty,” said Dai Fang, a Shanghai-based analyst at Zheshang Securities Co. “If it works, there surely will be other developers following suit.”

China’s home sales slumped 10.2 percent in the first five months of this year from the same period a year earlier amid tight credit and an economic slowdown, reversing last year’s 27 percent jump. The average new-home price in 100 cities tracked by SouFun Holdings Ltd. fell 0.5 percent in June from the previous month, accelerating from the 0.3 percent decline in May that ended 23 consecutive months of gains.

Purchasing Power

For closely held Shanheng Real Estate, which is controlled by Shanghai-based clothing maker Shanshan Group Co., the buyback offer helped attract more than 1,000 potential buyers to its Yishanjun project, meaning “mountainside homes” in Chinese, a half-hour drive from downtown Hangzhou during the three-day Dragon Boat Festival holiday that ended June 2.

More than 50 of the at least 100 units eligible for the buyback were sold, exceeding the project’s total sales in the first five months of the year combined, according to the company’s President Xiao Jixiao.

“The five-year buyback helped a lot of people who wanted to buy make up their minds,” Xiao told Zhejiang Online in an interview, according to a video posted on the news website affiliated with the Communist Party’s local commission in the eastern province of Zhejiang. “The purchasing power in the market remains very strong.” The Shanghai-based developer declined to comment when contacted by phone.

Uncertain Outlook

Yishanjun is selling at an average price of 7,000 yuan ($1,126) a square meter (10.76 square feet), down from 9,000 yuan last year, according to sales information on Inc.’s real estate website.

New-home prices in Hangzhou, capital of Zhejiang province and popular with tourists for its West Lake, fell 1.4 percent in May from April amid high inventories, the biggest decline among the 70 Chinese cities tracked by the National Bureau of Statistics.

Slowing sales in Hangzhou are already hurting some of the city’s other developers. Standard & Poor’s cut Zhong An Real Estate Ltd.’s long-term corporate credit rating to B- from B in a June 27 report, citing “worsening operating conditions,” particularly in the developer’s biggest market of Hangzhou that are likely to weaken cash flows.

‘Root Cause’

Hangzhou-based DoThink Group said it is offering to buy back more than 200 apartments in Wenzhou, ranging from 70 square meters to 190 square meters, through private equity unit Kylin Investment Management Co.

The closely held developer has built more than 10 million square meters of homes and office buildings since 1993.

“Many developers have tried various marketing methods to get cash back, but they all missed the root cause” of falling home sales, Kylin’s Chief Executive Officer Huang Dong said by phone from Hangzhou. “The key is lack of confidence and the uncertain outlook” of the property market.

Underground Lending

A Kylin-managed fund will sign agreements to buy back homes after buyers pay the full price and hold the property for three years, a measure that can prop up confidence in the value of the properties, Huang said.

The company raised 200 million yuan in May from investors for a three-year property fund that will agree to buy the apartments at 120 percent of the current selling price, he said. That level is still profitable because the projects’ land and construction costs were low after the local property market declined in the past few years, enabling the projects to be priced competitively, Huang said.

The average new-home price in Wenzhou, known for pioneering local entrepreneurs, has slumped 35 percent since its peak in November 2011 after a thriving underground lending market collapsed, while the national average climbed 12 percent in the period, according to SouFun, China’s biggest real estate website owner.

Prices in Beijing jumped 40 percent during the period and surged 19 percent in Shanghai, according to SouFun.

Sales Targets

“Given rising sales pressure, we expect developers to offer more attractive pricing” in the second half of the year, Barclays Plc’s Hong Kong-based property analysts led by Alvin Wong wrote in a report June 24.

Contracted sales as of May 31 at 28 developers tracked by Barclays accounted for only 30 percent of their full-year targets, suggesting they can only complete 36 percent in the first half, “significantly lower” than the 47 percent a year earlier, the analysts wrote in a June 12 report.

A gauge tracking Shanghai-listed real estate companies fell 0.4 percent at the market close, extending this year’s decline to 6.2 percent.

Shanghai Yuehe Real Estate Co.’s construction of mixed-use residential and commercial project in the city was halted last month after the closely held company couldn’t find sufficient funds, and the project was frozen by a court, two government officials familiar with the matter said last week.

Prolonged Downturn

About 120 miles away in the eastern city of Fenghua, Zhejiang Xingrun Real Estate Co. became insolvent in March with 3.5 billion yuan in debt, and its founder was detained for illegal fundraising, a local official said at the time.

To combat the weaker market in Guangzhou, in the southern province of Guangdong, almost 20 housing developments rolled out no-down-payment plans to boost sales, Nanfang Daily, Guangdong’s official Communist Party newspaper, reported in April, as government agencies in Guangzhou and Shenzhen issued warnings against the practice.

China’s property market downturn this time will be more prolonged than the last two corrections, Tom Byrne, a senior vice president at Moody’s Investors Service, said at a conference in Shanghai June 19. A 10 percent drop in property sales and building construction will lower the country’s economic growth rate to between 5 percent and 6 percent, he said.

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