Developers In China Combat Real Estate Oversupply With Wacky Deals And Deep Discounts

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China Ghost City
A farmer carrying a rake walks down a dirt road past a replica of the Eiffel Tower at the Tianducheng development in Hangzhou, Zhejiang Province August 1, 2013. Tianducheng, developed by Zhejiang Guangsha Co. Ltd., started construction in 2007 and was known as a knockoff of Paris with a scaled replica of the Eiffel Tower standing at 108 metres (354 ft) and Parisian houses. Although designed to accommodate at least 10 thousand people, Tianducheng remains sparsely populated and is now considered as a "ghost town", according to local media.

Every month, the agents at a small real estate office in Ningbo, China -- a booming coastal city south of Shanghai -- gather to discuss their so-called “trouble projects,” meaning developments needing an extra push to fill vacancies.  

In Ningbo, as in many medium-sized Chinese cities, more and more projects are looking like trouble, threatening the health of developers, the banks that have financed their undertakings and, perhaps, the state of the economy in the world's most populous nation. The situation has gotten so intense that real estate agents are going to extraordinary lengths to persuade people to buy.

“When it comes to making a sale more enticing, we’ve considered offering all sorts of things: free parking spots, garden plots, iPhones, gift cards -- whatever will give us even a small advantage,” one real estate agent in Ningbo told International Business Times, speaking on condition he not be named lest he appear desperate for sales. “It’s tough to compete without those kinds of amenities or deals. Everyone is doing it.”

Three years ago, a development in another coastal city, Wenzhou, made headlines when one property agency offered BMWs for the first 150 buyers of the complex. At the time, this was considered the pinnacle of incentive marketing in smaller Chinese markets. Since then, the trend has only expanded.

In the southwestern city of Kunming, some developers now advertise “buy one floor, get two floors free” deals at an apartment complex called Helen International. The apartments are located in the Chenggong area of the city, known for being one of China’s many grossly overbuilt “ghost cities.”

At another complex in Kunming called Apple City, cash up front is encouraged by the brokers, who are offering a 20 percent discount for buyers who can pay 90 percent of the full amount. Throwing in free floor space and incentivizing large cash payments further highlights the oversupply that has hit the area.  

In the northern Chinese city of Dongying, in Shandong province, one developer has been employing bikini-clad foreign models, a rarity in China, to lure buyers and create buzz during the recent Tomb-Sweeping Day holiday. The scantily dressed women sat atop shiny luxury cars parked in front of big promotional billboards showing projected images of what the development would eventually look like -- an impressive space, complete with pristine pools, and other state-of-the-art facilities. The reality behind the models was less enthralling: two towering half-finished concrete skeletons.

The sense of desperation lacing China's real estate market has intensified in recent months as the extent of continued over-building has emerged, bringing down some vulnerable companies.

The recent default of Zhejiang Xingrun Real Estate Co., a Chinese developer that was unable to repay its bank loans, shook the industry and earned the distinction of being the country’s first domestic bond default. News of the failure -- Zhejiang Xingrun’s unpaid debts reportedly amounted to $567 million -- killed the widely held notion that China’s central government is a safety net for troubled real estate developments.

In China’s smaller and less prestigious cities, real estate supply is significantly ahead of demand, fueled by continued building despite the controlled investment-slowdown climate engineered by the government to prevent an overheating of the economy.

“We believe more property developers will face similar pressures as transaction volumes slow and cash flow conditions tighten, and expect this problem to be more severe for unlisted developers in third- and fourth- tier cities with limited access to [state] financing,” Zhiwei Zhang, a Nomura economist, said.

According to CBRE, a Los Angeles-based real-estate brokerage firm and research group, the average vacancy rate in second-tier cities in China is about 21 percent, double of what is considered to be a healthy number. Speaking to China’s Economic Review, Frank Chen, the head of China research at CBRE, says in some other second-tier and smaller cities, the numbers are even grimmer. For example, vacancy rates in commercial real estate in the southwestern city of Chengdu, a second-tier city that has more investment potential, were as high as 44 percent.

This is the backdrop as real estate agencies across the country resort to flashy promotional activities aimed at snagging buyers.

In the eastern city of Changzhou an online listing by agents at Jing Xin Ding beckons with previously unimaginable price cuts. Agents began offering space at dirt-cheap rates, going for just 15 yuan per square meter, which is about 73 cents per square foot. A closer look at the listing shows that the pricing only goes into effect after purchasing 100 square meters at regular prices, which usually are 95 yuan per square meter or a little more than $4.66 per square foot. The manager of the development confirmed that the sale was a ploy to attract people into buying larger spaces in a sluggish market.

Chengdu, in the southwestern province of Sichuan, embodies the problem faced by many Chinese cities -- a huge oversupply of buildings spurred by abundant finance. Nearly half the offices in the city are now vacant, and the problem is expected to worsen: More than 1.5 million square meters of space are scheduled to be completed this year.

The situation in China’s third- and fourth-tier cities is even more desperate, as the gap between development projects and sales continues to widen dramatically.

“Many developers are focusing on clearing inventory to improve their cash flow,” Catherine Chen, the head of research and strategy in Greater China at LaSalle Investment Management, said. Chen explained that while larger developers can rely on other projects in healthier areas, “smaller developers with high concentration risk are relatively more desperate to offload inventory.”

But all hope is not lost -- at least for the nation’s burgeoning second-tier cities. Though they still face a real estate crisis, there is still the possibility of a rebound in the commercial sector by relying more heavily on potential foreign investment by international businesses that are branching out from their Chinese headquarters, commonly located in Beijing or Shanghai.

Alistair Hughes, CEO of commercial real estate manager Jones Lang LaSalle’s Asia Pacific division, wrote that JLL is planning to open a new office in Xi’an.

“Xi’an’s vital statistics are impressive. It’s a city of eight and a half million people with an annual GDP of $71 billion, growing 12 percent annually … Professional services companies, like JLL, are also growing. Our revenues and profits across China have been growing at 20 percent per annum since 2008 and we are employing and training more and more people.”

Urbanization, prompted by expanding international and domestic business, may be the life raft for the sinking ship that is smaller-market real estate, drawing in the people and dollars needed to fill up the empty apartment buildings, office towers and shopping malls, eventually bringing demand in line with supply.

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