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China property developers wary of poor sales

For the first time in more than three years, land plots that went up for auction in Beijing were unsold. This suggests a mismatch between what developers are willing to pay and what local governments want.

China roads
Source: Bloomberg

Last week, two out of the five lots up for sale by the Beijing government received no bids – the first time since April 2011, according to local media.

This was followed by another relatively disappointing auction on Monday, where two out of the four lots on auction were sold at lower-than-expected prices.

We’re likely to see the relatively muted appetite by property developers continue, as investors get increasingly concerned over a property slump and take a wait-and-see attitude.

Cash tight developers are unlikely to be keen on paying any high premiums and hoping for a property turnaround. Last month, some had resorted to offering buyback guarantees in an effort to attract buyers and possibly to strengthen their cashflow positions.

There have also been developers offering outright discounts or delaying projects to wait out the slump.

More signs of slowdown

HSBC China services PMI for July released yesterday also suggested a slowdown in the sector. The reading came in at 50.0, the lowest in nine years. This suggested a slowdown driven by property-related activity such as agencies and residential services.

According to a survey of 100 Chinese cities by data provider China Real Estate Index System housing prices in China fell in July, its third consecutive month, suggesting a decline may be accelerating,

Average new home prices dropped 0.8% in July from the previous month, picking up the pace from June’s 0.5% month-on-month dip. Prices in May had declined 0.3%, which was the first sequential drop since mid-2012.

We’ll get another glimpse and confirmation of how the sector is faring when we get official statistics for July’s housing prices on August 18, from China’s National Bureau of Statistics. 

Heading into the release of this data, we could expect some pressure on the stock prices of Chinese developers as investors get more cautious and hold back their expectations.

What could lift sentiment would be the release of further accommodative measures, such as targeted reserve requirement ratio cuts to boost bank lending, or support for local governments to lower land auction prices.

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