2012-03-27

Chinese developers rush to unload ¥5 trillion inventory

Chinese developers are putting 100% of their workforce into sales with inventory and debt pressure mounting, as ¥5 trillion in inventory weighs on their balance sheets. Inventory increased 50% in 2011 over 2010; the average inventory per developer is ¥10 billion.

Among them, China Merchants (000024.SZ) had inventory of ¥51.44 billion yuan, an increase of 33% over 2010; Vanke (000002.SZ) inventory reached ¥208.3 billion yuan, up 56%; Beijing Capital Development (600376.SS) ¥43.049 billion, an increase of 72%; Sino-Ocean (3377.HK) inventory is quite small, but the increase was very high, from ¥231 million at the end of 2010 to ¥487 million at the end of 2011, an increase of 111%.

Credit remain tight, trust loans are coming due and the inventory has become a nightmare for the developers. Ren Zhongwei of Beijing Normal University's Institute for Monetary Research estimates the inventory has a cost of capital of ¥345. In 2011, the property sector had profits of ¥500 billion, but this will fall in 2012 and that could put the industry close to break even.

Industry analysts say that after the "winter" comes the selling season. Sales dried up at the end of 2011 and into 2012, while prices declined. Now comes the rush to unload inventory and what I expect will be the waterfall price declines, as I wrote here:
To sum things up: home prices need to fall at least 20% in order for buyers to see their costs decline, due to higher interest rates and taxes. There's some local differences such as the high transaction tax in Beijing, but overall, it seems that 20% is a good rough estimate. On top of that, prices will need to fall at least another 5 to 10% to attract buyers who now expect price declines. Now we're talking about a 30% price decline as the baseline scenario! Markets always overshoot and China will be no different. Waterfall price declines are coming in 2012; local government and the banking sector will be severely impacted.
I do not have a wave count on Chinese home prices, but to put it into terms of Elliot Wave, wave 3 is coming. The "winter" of 2011 and early 2012 was wave 1, the recent thaw that's seen transaction volumes and some prices rebound is wave 2.

Source: 500强房企库存近5万亿 开发商进入全员卖房模式

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