HONG KONG (Reuters) - Chinese property developers are slowing land purchases and plan to be more selective about where they build, as sales soften from tightening measures and a deteriorating economic outlook.
Market confidence has been hit by the Sino-U.S. trade war and buyers continue to be wary even though there have been recent signs of a loosening in policy in certain cities. A dearth of construction could add unexpected pressure on the economy in 2020.
Contract sales by the top 100 Chinese developers in July posted a 29% decline from June, data from research firm CRIC showed, while the value of land sold in the 300 cities it tracks dropped 16.6%. Land premiums also softened 6 percentage points to 13% in July, returning to levels seen at the start of the year.
After two years of breakneck growth, China’s property market hit a downturn in the second half of last year following a series of cooling measures by the government to contain prices. Beijing recently dashed hopes it would loosen its grip on those measures to stabilize the economy, saying it will not use the property market as a form of short-term stimulus.
An official of Shanghai-based property developer CIFI Holdings said the company, one of the country’s top 20, will buy less land for the rest of the year than originally planned.
“When sales are not so optimistic, buying less land would be a new norm for the industry,” he said. The official declined to be named because he was not authorized to speak to media.
Developers usually spend 30% to 40% of their contracted sales during the period to replenish land.
Guangzhou R&F Properties, whose sales in the first seven months gained 5% on the year, a significant drop from 51% growth a year earlier, said in an internal document last week it would stop land purchases altogether in the second half, according to local media.
It also asked staff to speed up sales as the figure so far - at 71 billion yuan ($10.1 billion) as of the end of July - was still a distance from the full-year target of 160 billion yuan.
CIFI did not respond to email request for comment. R&F declined to comment.
Large developers usually own landbanks that can last for three years of development. In the first six months this year, the top 50 developers acquired 6.4 percent more new land parcels than a year ago in terms of area, according to CREIS data.
Picking land parcels strategically is also becoming increasingly important, and difficult. One mid-sized developer said they prefer second- and third-tier cities with less restrictive measures, yet with a net population inflow so that the company can still expect a high turnover.
Analysts expect margins for developers to start to decline from the first half of this year due to rising land costs and housing price caps.
“Given the falling margin trend, we think some companies could lower their 2019 earnings guidance,” UBS head of China real estate research John Lam said in a research report.
He expected most companies would keep their 2019 sales targets but become more prudent in setting 2020 sales growth outlooks amid the current tight liquidity conditions.
Beijing looks likely to keep a tight grip on credit to avoid bubble risk, such as restricting developers from issuing bonds to fund land acquisitions.
The tight financing conditions have been especially tough for smaller builders. Nearly 300 property developers had filed for bankruptcy this year by the end of July, the Securities Daily reported, citing court filings. Most of the companies were small developers focusing on third and fourth tier cities.
The figure is around 50% higher than the year before, but is still low compared with 2014 when 2,000 developers went under water, analysts said, adding that it was the intention of the central government to see the sector consolidate. China is estimated to have more than 40,000 developers and most are small and fundamentally weak.
While bankruptcy is not a concern for most of the larger developers, as they have bigger credit lines and can diversify their risks across developments in different cities, they are tapping as many financing channels as they can before the winter arrives.
“We still have quota (for dollar bond issuance) left, but we’re worried that next year’s quota could be impacted,” said a CFO of a developer in eastern China.
Editing by Jacqueline Wong