Why China property developers are getting cold feet

China yuan coins

China property developers’ appetite for land has diminished, and that’s likely because officials are clamping down on the cash handouts to shantytown residents which have been supporting demand, Capital Economics said in a note last week.

“Real estate developers seem to be getting cold feet,” it said.

In July, China’s housing ministry said in July it would start restricting cash handouts to compensate relocated shantytown residents in cities with rapid property price rises, while the China Development Bank pared back its “shantytown loans,” which were an important source for financing those payments, the note said.

The payments had been increasingly used in place of developing social housing and had propped up home sales and prices in lower-tier cities this year, Capital Economics said, adding that had offset the broader drag from higher mortgage rates, stricter down-payment requirements and other curbs put in place in 2017.

“The prospect of reduced support to the property market from the shantytown redevelopment scheme seems to be leading developers to reassess their projections of future prices and demand and the risk of being left with a renewed glut of unsold property,” the note said. “If this is the case, it is likely to translate into slower growth in new property starts, which are highly correlated with land purchases.”

It noted that land transaction volumes fell last month and premiums paid during auctions fell to a more than three year low, with more auctions reportedly failing entirely.

“With the land market now cooling, we think it’s only a matter of time before the sharp pick-up in land acquisition costs fades, resulting in an additional drag to property investment growth,” the note said.

 

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