Chinese real estate market on verge of collapse

Only a few days ago we reported about the impending default of one of China’s well-known real estate development companies, in the shape of the Zhejiang Xingrun Real Estate Company, and the fact that there were problems in the real estate market. These problems appear to have surfaced in March with a recent report by the UK financial Times confirming that sales volumes were down 34% during the first 23 days of March compared to the same period last year. However, is it a fair comparison?

Until just a few weeks ago there was no real concern that the Chinese real estate market was in trouble, development companies were feeling the squeeze and demand was falling. Even though some people were suggesting problems ahead nobody quite expected such a short sharp shock.

What does this sales data mean?

Aside from the fact that demand for Chinese real estate is obviously falling, and falling dramatically, this sales data perfectly illustrates the problems ahead. Indeed when you also bear in mind there has been an increase in available floor space (in the region of 21% compared to March last year) this highlights yet more issues. Falling sales volumes and increasing floorspace will inevitably lead to a reduction in real estate prices which will leave many development companies struggling with cash flow issues.

Comment from PropertyForum.com : “Chinese investors are really cash rich and there are a lot of New Rich from there. No surprise they will flood everywhere including southeast Asia like Singapore, Malaysia, Australia, Myanmar, London, USA and even Taiwan.”

Over the last few years the Chinese real estate market has been something of a magnet for overseas investors, indeed many have made significant returns, but there are signs this appetite is waning. The problem is that if overseas investors withdraw their funds, demand continues to fall and floorspace continues to rise, we could be on the verge of an implosion of the Chinese real estate market.

Is the market beyond the point of no return?

For a good couple of years now the Chinese government has been attempting to get a grip of the Chinese real estate market, it has been trying to talk down real estate prices and indeed there have been attempts to reduce investment funding. Surprisingly, when bearing in mind the history of Chinese governments, these attempts failed miserably and the market continued to go from strength to strength. So what can the government do now?

The major problem at the moment is the fact that at least one development company has admitted cash flow issues and this will flush out a number of weaker companies as investors look to withdraw their funds. What started as something of a ripple across the Chinese real estate development sector could very quickly turn into a tsunami taking away many of the weaker Chinese real estate developers. While this could potentially be good news in the long term, flushing out many of the weaker and more speculative companies, it could become something of a bloodbath in the short to medium term.

Conclusion

The Chinese government has been warning of such problems within the real estate sector for some time now, these warnings were effectively ignored and the sector and investors are now set to pay the price. The Chinese government will do what it can to support the real estate industry, will offer financial assistance where applicable but the sector has turned, investors are now shying away and many Chinese real estate developers will pay the price.