China developers' funding source at risk in pre-sales crackdown

SHANGHAI • China's debt-laden developers face a potentially devastating blow to their biggest source of financing, as the authorities consider putting an end to the practice of selling flats before they are finished.

Guangdong's provincial housing authority is considering scrapping such pre-sales, according to a document seen by Bloomberg News.

The system lets developers receive the entire sale proceeds upfront before construction has finished, which they then use to finance further land purchases and developments.

The move would place further strain on the sector, which is facing a record US$23 billion (S$31.4 billion) maturity wall in the first quarter of next year.

Shares of Chinese developers fell in Hong Kong trading yesterday.

Country Garden Holdings, which has relied on pre-sales to help fuel its growth, slumped as much as 8 per cent before closing 5.6 per cent lower. China Evergrande Group declined 4.9 per cent and closed 3.6 per cent lower. A gauge of 22 major Chinese developers, mostly traded in Hong Kong, slid 4 per cent, the biggest fall in almost six weeks.

The authorities want to move away from pre-sales to curb risk in China's real estate market, which by some estimates accounts for as much as 20 per cent of the country's gross domestic product.

The document noted that the current system fuels excessive property investment and has attracted incompetent developers into the industry. Ending it would help reduce the sector's high leverage and tackle related financial risks, it added.

In a worst-case scenario of a complete overhaul, "about a third of small developers will disappear", said property analyst Zhao Ke of China Merchants Securities.

The official Guangzhou Daily said on Sunday the changes under consideration are still at the opinion-gathering stage.

An investor presentation said it takes just 9.6 months on average for a builder to break even from land purchases. That's much faster than elsewhere in the world.

"The biggest pros of the pre-sales system is to add leverage and expedite turnover, which is necessary in encouraging supply during a housing shortage," said Professor Chen Jie, a property market specialist at Shanghai University of Finance and Economics. "Yet nowadays, it spurs excessive expansion by developers."

Cracking down on pre-sale rules would fit President Xi Jinping's exhortation last year that homes are not for speculation, said property analyst Yan Yuejin of China Real Estate Information in Shanghai.

It's not the first time the authorities have looked to curb pre-sales.

In June, Zhongshan city auctioned its first plot of land barring pre-sales. And neighbouring Jiangmen city has drafted rules to cancel pre-sale activities from next month.

"Buyers' money should no longer be used as ammunition for developers to buy pricey land and expand in full swing," said Prof Chen.


A version of this article appeared in the print edition of The Straits Times on September 25, 2018, with the headline 'China developers' funding source at risk in pre-sales crackdown'. Subscribe