Zero profit homes in Beijing: developers sell for cost to recoup capital

“零利润”楼盘再现楼市 关键看购房者是否买账 ("Zero Profit" buildings, will home buyers buy)

Below are some key portions of the article, translated or summarized.

A Dongya Xinhua Group (东亚新华) development in Tongzhou, Beijing is selling at cost. At the end of last year, this development sold for 13,200 yuan/square meter. Today, the price is down to 12,400 yuan/sqm—and estimates put the development cost at more than 12,000 yuan/sqm.

At the end of 2011 in Tongzhou, Dongya Xinhua's Yipin Court sold for a new market low of 13,200 yuan/sqm and a neighboring property slashed its price. A Pearl River International property was expected to sell for about 24,000 yuan/sqm based on cost plus an 8% profit. Instead, the property hit the market at an "eye popping" 13,200 yuan/sqm, including 10-15% of free floor space, meaning even that final price was discounted.

Based on land and construction costs, the Dongya Xinhua property cost about 12,347 yuan to build, barely below the current sales price.

In early 2010, the average transaction price was more than 20,000 yuan/sqm, with some properties selling for more than 30,000 yuan/sqm. Today, that average has fallen to between 13000 and 16000 yuan/sqm.

Industry insiders say it isn't that developers don't want to cut prices, it's that they bought land at peak prices in 2009 and 2010, and it's not realistic for them to sell below cost, at most are the properties such as Yipin Court that are recovering their capital.

To deal with the depressed and deadlocked market, developers have tried direct price cuts, but these aren't working. They are racking their brains to come up with innovative marketing ideas. Aside from the "zero profit" strategy, controlling the supply of homes reaching the market, help with down payments and delayed sales are just a few of the myriad methods employed.

In reality, price is their only weapon. Either a low price or a good value (price-quality ratio) will attract buyers, such as the Longhu property which was the first "zero profit" development to hit the market. It set a sales record and sold over 100 million yuan of homes in January. As of the first half of February, Longhu was the sales champion for the area. The Dongya Xinhua property is seeing similar attention. In January, there were 78 phone inquiries; that has quadrupled to 332 in February. There were only 40 visits in January, but already 109 in February. Dongya Xinhua's marketing head Jia Yupeng said the sales cycle is longer now. Buyers hesitate for about a month, to wait and see if there will be policy changes and investigating the price-quality ratio of surrounding properties. He expects sales will steadily rise in March.

Developers are still using strategies such as "buy a house, get free appliances" and auto shows, in addition to giving away movie tickets and birthday parties, as they give it their all. Chairman of 伟业我爱我家 (I Love My Home) Chariman Hu Jinghui said the buyers have the initiative due to the level of inventory. Whether firms earn zero profit or a small profit will depend on whether the buyer thinks the price is good; it makes no difference to them whether the developer earns a profit.

A new property in Chaoyang near the Beiyuan subway stop is selling 65 sqm units for 17,500 yuan/sqm, much less than the surrounding average price of 25,000 yuan/sqm and attracting a lot of interest from buyers. About 55% of the units were sold and last week, new units came to market at 19,000 yuan/sqm and already half have been sold.

There are more examples of price cuts boosting sales and comments from various analysts. Near the end, one analyst says that of the new buildings hitting in Beijing in March, the average price reduction is 40%.

“零利润”楼盘再现楼市 关键看购房者是否买账 ("Zero Profit" buildings, will home buyers buy)

Below is the cover page of the real estate section of the Beijing Times (京华时报) for Friday, February 24, 2012.

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