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Hong Kong Investors Hunker Down As Real Estate Slump Hits Dalian

With the mainland set for a two-to-three years shakedown in the real estate industry, Dalian provides a microcosm of the wider challenges. With price cuts failing to stimulate the sector, Hong Kong developers are preparing to wait it out.

Photo: Cut price anger: existing residents protested when developers introduced low-cost deals.
Cut price anger: existing residents protested when developers introduced low-cost deals.
Photo: Cut price anger: existing residents protested when developers introduced low-cost deals.
Cut price anger: existing residents protested when developers introduced low-cost deals.

With house prices dropping across the mainland, Dalian is proving no exception. The price of homes in the northeastern coastal city has fallen by 1.65% year-on-year, according to the 100 City Price Index Report for June 2014.

The report, published by the China Index Academy, an independent provider of real estate data, records the first fall in the city's residential prices for nine months, with average valuation now down to Rmb11,798. The findings also show that this fall in overall house prices have not triggered increased demand.

In the first half of the year, the total floor space of new residential homes sold in Dalian dropped by 36%. The performance in the secondary market was even worse, with the sector witnessing an average price drop of Rmb1,115 and an inventory of over 50,000 units. This is said to be the highest level for a decade.

The decline in Dalian's real estate sector is of particular significance to Hong Kong given the sheer number of the city's companies invested in the sector. It is believed that a number of such businesses are already reviewing their options. Anecdotal evidence suggests that several Hong-Kong-backed projects are already considering cutting prices in a bid to recoup capital in the short term. Such a strategy, however, is not without its own risks.

According to a recent report by China Central Television (CCTV), a drastic price cut implemented by one mainland developer at a housing project in Dalian's Donggang commercial district spurred protests by more than 100 existing purchasers. The homeowners were angered that, in a bid to stimulate sales, prospective purchasers were being offered far better deals than those secured by current residents.

Photo: Poor sales for one Hong Kong-invested property in Dalian.
Poor sales for one Hong Kong-invested property in Dalian.
Photo: Poor sales for one Hong Kong-invested property in Dalian.
Poor sales for one Hong Kong-invested property in Dalian.

According to most of industry organisations, the mainland property market is now facing a two-to-three years adjustment period, during which the focus will be on exhausting the current housing stocks. Inevitably, this has led a decline in land purchases by many developers.

As proof of this, a July 2014 land auction in Dalian saw one lot sold at highly-discounted rate, while a second was withdrawn by the vendor. A further factor now coming into play is a widespread concern that developers will cut construction costs – and quality – in order to maintain profits. This is acting to further deter potential purchasers.

While the golden era of mainland property development may be over – or at least on hiatus – the current situation is also seen as ushering in an overdue 'shakedown' in the sector. While a number of developers may be driven out of business by the collapse in the market, those that survive this downturn will find themselves in a preeminent position in a far leaner industry.

It is believed that Hong Kong developers are particularly well-positioned to weather this particular storm. As well as having firm financial backing, the quality of Hong Kong-backed developments, in addition to the superior management resource involved, is likely to leave the city's developers in pole position once the market rallies.

John Yu, Dalian Office

Content provided by Picture: HKTDC Research
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