China's biggest developer cuts prices, but rents up in many cities

Why is Vanke Reducing its Property Prices?

Though Vanke Group, China's largest residential real estate developer, gained a business revenue of around 35.5 billion yuan in the first half of 2010, its Shenzhen subsidiary has reduced the price of its small-sized apartments from around 20,000 yuan per square meter to 9,000 yuan; triggering the spread of the rumor that Vanke is cutting the prices of all its properties.

On June 16, Vanke's Shanghai subsidiary began selling its products at a price of 32,000 yuan per square meter, 5,000 yuan less than their original price.

Prices are coming down in some areas of the market due to the recent spate of regulations, such as higher down payments, higher interest rates, and restrictions on second and third mortgages.

On June 20, the price of homes in Tianyangcheng, a property project located in Hebei Province near Beijing, was reduced from 11,000 yuan per square meter to 7,800 yuan, the largest deduction rate in Beijing since April.

Li Yibing, deputy general manager of Tianyang Property, said to an EO reporter, "We performed a one-time steep drop in our prices, we do not want to waste time bargaining."

He said, the Tianyang Property wanted home buyers to know that a 30 percent discount was the bottom line and there would be no lower price.

Tianyang has got what it wanted. On the first day it announced the 30 percent discount, almost all of its 300 houses were sold out.

It is not easy to know where housing prices will go from here, however, we may get some clues from the financial conditions of property enterprises. Adfaith, one of China's leading consultancy companies, has conducted a survey of 30 mainstream listed property firms which shows, if their trade volume decreases by 30 percent, the companies that would suffer from the most severe shortage of money would be property giants Evergrande and Poly Real Estate, with a funding shortage of over ten billion yuan.

Many real estate companies failed to sell a single property in May and June. Therefore a 30 percent deduction in trade volume is a conservative prediction. "Though developers all knew that there would be new regulation on the property market starting earlier this year, they still chose to expand their business. This has caused their cash outflow to be almost equal to that of the first half of last year, yet their sales volume has greatly decreased in the second quarter of this year," Hao Ju, Adfaith's deputy president, said.

He continued, in 2009, property companies all had positive cash flow. But if they expanded too fast, their sales revenue would not be able to support their expansion. Poly Real Estate serves as a good example of the risks of rapid expansion.

However, the problem of capital shortage may be solved through various means of financing. "Among all the tests on companies' capital shortfalls, the biggest uncertainty lies in their financing methods." Hao Ju said.

With home prices down and real estate companies struggling, rents are filling in the gaps for some real estate firms.

Rents on the Rise in Chinese Cities

Although the housing prices in Beijing have been cooling down, rents are climbing.

The average rent of housing in Beijing was 2,885 yuan per month in May, up 20 percent on the level of the same period last year, according to statistics from Lianjia Property, a real estate agency in Beijing.

For example, a house with two bedrooms located near Beijing's third-ring road only cost 2,600 yuan per month to rent before May, but now costs 3,000 yuan per month. Additionally, to rent a single room only ten square meters large located in the same neighborhood costs at least 1,200 yuan per month.

"The lasting recession in the second-hand property market has made housing rentals the main source of revenue for real estate agencies. They have to rely on rentals to meet the cost of their overheads," a source who once worked as a deputy general manager of a real estate agency said.

Conflicts among real estate agencies have occurred recently in Beijing over clients, property and even advertising space, indicating a severely competitive market.

Aside from seeking more property to rent out, real estate agencies also try to make the most of existing housing. For example, agencies will divide a 130 square meter apartment into six separate rooms and then rent it out to about ten people at a total price of 7,500 yuan per month. The apartment owner only earns 6,000 yuan per month from his property; the real estate agency will earn about 15,000 yuan per year from a single apartment.

Seeking larger profits, some agencies even encourage homeowners to raise their rents. For example, when renting a one bedroom apartment, an agency will recommend the homeowner to ask for 2,800 to 3,200 yuan per month. Last year, the price of a one-bedroom apartment was only 2,000 yuan per month.

With severe battles taking place among real estate agencies, some have monopolized the rental market of certain housing communities in order to have more say in pricing them.

Eventually, the competition will break the rental market and rents will move lower, assuming the market is allowed to function. The Chinese government may decide to undo some restrictions in order to support home prices, if the decline in prices becomes too large.