CRACKS IN THE EDIFICE
Trouble in real estate.
By The Economist

Of all the easy ways to make a killing investing in China in recent years, the easiest by far was property. This is getting more difficult by the day. Stock market sentiment toward China’s property developers has plummeted. That rout has not translated into a comparable drop in the prices of flats or rental rates for offices—yet. But price appreciation has slowed (see chart). While national statistics cite no outright declines, unofficial reports indicate that prices are already under pressure.

In Shanghai, for example, many developers have retained the list price for units but are offering “rebates,” which can take 10 percent or more off the purchase price. Numerous units are being held off the market in the hope of a recovery. Worst affected are the big cities of southern China, notably Shenzhen, which only a year ago was an extremely hot market. The average price of flats in the city has fallen by 28 percent since October. The value of some may have dropped by half. Areas around Beijing have been more resilient but the rate of appreciation has slowed.

Explanations for the crunch are not hard to find. In southern China business conditions have deteriorated, notably for exporters. The government has tightened credit where it senses property speculation. In a frank admission, Ronnie Chan, chairman of Hang Lung Properties, a leading developer in China, wrote last month that the second half of 2007 was characterized by a “land grab” with no price discipline. As an example, he referred to a site in western China sold at government auction to a competitor for 20 times what he had paid for a similar property a year before. Recovering the cost of the investment on deals like these would take years, he said. Few would be surprised if some of the more aggressive firms do not have the financial strength to survive that long.