HONG KONG, June 13 (Reuters) - Chinese property developers may be forced to embrace steeper price cuts, broader promotions or a change in strategy in the third quarter as they scramble to meet 2014 sales targets after many achieved less than 30 percent of their forecasts in the first five months.
Price cuts would help boost sales and lower inventories, easing an oversupply of housing in the world’s second-largest economy. The cuts could however, come at the cost of profitability for many developers.
Some developers are opting to adjust their strategies by introducing more basic housing where demand is solid compared to luxury apartments and by turning to commercial projects.
“We are seeing more developers changing to renting their properties from selling because the market is very slow. By renting they can at least get some revenue,” said Raymond Wei, the Shanghai-based general manager for the commercial sector for realtor Centaline Property Agency Ltd.
Rating agency Standard and Poor’s said this week it expects China’s property sales to pick up from June, boosted by price cuts, and forecast full-year sales volume to rise 10 percent.
Thomas Frank, the head of valuation in China for property consultancy Knight Frank, said a 20 percent cut in prices in second and third-tier cities would be more healthy for sales.
China’s revenues from property sales dropped 8.5 percent in the first five months from a year earlier, the National Bureau of Statistics said on Friday, while growth in average new home prices in China slowed to a near one-year low in April, official data showed in May.
After seeing record sales of 8.14 trillion yuan ($1.31 trillion) in 2013, developers lifted their targets for this year by as much as 60 percent, despite a forecast slowdown in the real estate market as liquidity tightened and Beijing continued to cool the overheated sector.
In the first five months, at least 13 Hong Kong-listed Chinese developers said they recorded a drop in sales compared to a year earlier, with declines ranging from single digits to more than 50 percent.
China Resources Land said its sales fell 32 percent, resulting in it meeting just 28 percent of its full-year target.
“The market is very weak now, price cuts and promotions are very normal,” said Simon Fung, chief financial officer of Greentown China, which saw 9 percent growth in sales from January to May, reaching 35 percent of its target.
In China, many property developers offer promotions like free renovations or free parking spaces to attract buyers. Greentown China this week launched a new round of promotions, distributing a total of 30 billion yuan in cash coupons to existing clients to use in their next home purchase.
Fung said making a decision on price cuts in the second half will depend on its peer, Sunac China Holdings Ltd, which recently bought a 24.3 percent stake in the company.
Price cuts have proven to be effective for some companies. Evergrande Real Estate, which has been more aggressive on pricing and announced a 15 percent price cut early last month, saw sales grow 28 percent in May compared to a year ago.
The company’s sales from January to May grew 64 percent, meeting 51 percent of its target. Evergrande is expected to have a net gearing ratio of 204 percent this year according to Barclays.
“For those with poor sales and high gearing, they are more likely to have steeper price cuts,” said Karen Kwan, an analyst at Kim Eng Securities, adding that state-owned developers like China Resources Land Ltd, which is cash-rich, are less likely to cut prices.
“The cuts will be steeper in cities with more inventory. I expect oversupply to improve by year-end as new construction in the past few months has also dropped. The supply will fall in the next six to nine months,” Kwan said.
$1 = 6.2227 Chinese yuan Editing by Matt Driskill