China Targets Developer Presales

Chinese developers use presales to finance construction. This avenue of funding is now gone in six cities.

SCMP: Chinese property stocks hit as housing ministry instructs six provinces to conduct in-depth study of pre-sales

Chinese property stocks fell on Tuesday after a long weekend break amid reports of possible property pre-sale restrictions in Guangdong and five other provinces, while the ongoing US-China trade war continued to hurt the overall market sentiment.

...According to a Reuters report on Tuesday, citing housing ministry document, six Chinese provinces – Hubei, Sichuan, Jiangsu, Henan, Guangdong and Liaoning – have been told to reconsider the pre-sale system, which is a key source for builders to finance projects.

The ministry has instructed local housing bureaus of these provinces to make an in-depth study of the pre-sale system, and set out reasons why it should be retained or scrapped, the report added.

Although the government asked for a study, Guangdong's real estate industry is preparing for a phaseout. iFeng: 卖楼花模式将终结？广东住建厅：现售是趋势

On September 21, following the new policy of shared property housing, the Guangdong housing market once again became the focus of the outside world: the Guangdong Real Estate Association issued an "Emergency Notice on the Relevant Opinions on Providing Pre-sale Permits for Commercial Housing" to the vice presidents (hereinafter referred to as "Notice"). The "Notice" stated that the Guangdong Provincial Department of Housing and Construction has cooperated with the Ministry of Housing and Urban-Rural Development to conduct a survey on the pre-sale system of commercial housing and to formulate relevant materials. It is proposed to "phase out the pre-sale system of commercial housing and fully implement the current sale". The material is scheduled to be reported to the Ministry of Housing and Urban-Rural Development on September 25.

...A related person from the Guangdong Provincial Housing Association told the reporter of China Business News: "The document is only for consultation and is not really implemented.

The biggest losers are the marginal developers who need this source of capital:

Song Ding, director of the Tourism and Real Estate Research Center of China Comprehensive Development Research Institute, said in an interview with Time Weekly that the current development funds for housing enterprises mainly come from three aspects: self-owned funds, bank loans and pre-sale backflow. "There is a very big test for the strength of housing enterprises." Song Ding said: "China's pre-sale system is the practice of studying Hong Kong's 'completed building' in the early years when developers' funds are tight but supply demand is high and development pace needs to be accelerated. After more than 20 years of implementation, the Chinese real estate market has changed. In the course of many years of implementation, the pre-sale system has also incurred most of the capital risks for buyers and the disputes over the board when the building was repossessed. The problem, overall, the current sale is the future trend."

For the impact of the cancellation of pre-sale on the survival of real estate companies, Yan Yuejin said that under the pre-sale system, if the developer builds a house, if it is a 30-story house, it can be pre-sold after 5 floors. The funds will be returned and the follow-up investment will be made. However, if the current sale is made, it may take 30 floors of the houses to be completed before the sales can be resold. This will put pressure on the funds of the housing enterprises. “The weak capital enterprises will not be able to develop. investment".

Song Ding said that the full implementation of the housing sales system, "will eliminate at least half of the housing enterprises, leaving some large, strong enterprises." For the supply tension that may be brought about by the sale, Song Ding believes that supply is tight in policy The promotion phase will definitely exist, but it depends on how the relevant cooperation methods are handled. "The market will gradually adapt to the future and eventually form a non-pre-sales pattern."

Others believe the system won't change for a couple of years:

Xiao Wenxiao concluded that the draft of the consultation will inevitably lead to a strong rebound in the industry, and the high intensity of the rebound should be within the expectations of the relevant departments. “Why do you still have to do such a temptation? A big possibility is to retreat and try to improve the threshold of pre-sale of commercial housing, which means that the pre-sale system is likely to be retained, at least not in two or three years. It may be canceled, but the threshold will increase. Currently, the supervision of the pre-sale system of commercial housing in the first- and second-tier cities is relatively in place, but some third- and fourth-tier cities need to be vigilant.” Xiao Wenxiao said, “If the big development encounters the market downturn, sell it’ There will be big problems in the uncompleted building.

Developer presales are a weak point in China's housing market. In several cases, such as in Handan, presales at the peak of a cycle led to partially constructed abandoned buildings and home buyers losing deposits. Presales are a form of leveraged home speculation and removing them is a positive for the market in the long-term, particularly for larger developers who will see their weaker competitors exit.