Cablegate: Southwest China's Real Estate Continues Pre-Quake Slide

VZCZCXRO5330
RR RUEHGH RUEHVC
DE RUEHCN #0241/01 3010808
ZNR UUUUU ZZH
R 270808Z OCT 08
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 2967
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 3623

UNCLAS SECTION 01 OF 02 CHENGDU 000241

SENSITIVE
SIPDIS

DEPT FOR EAP/CM

E.O. 12958: N/A
TAGS: ECON ELAB CH
SUBJECT: SOUTHWEST CHINA'S REAL ESTATE CONTINUES PRE-QUAKE SLIDE

CHENGDU 00000241 001.2 OF 002

1. (U) This cable contains sensitive but unclassified
information - not for distribution on the internet.

2. (SBU) Summary: Land prices and housing prices in Chengdu and
Chongqing, two major cities in southwest China, have been
declining since late last year as government regulations have
made buying second homes more difficult. Newly-built housing is
routinely being advertised for 25 - 33 percent below the
original sale price. Residential land prices in Chengdu have
also fallen by half or more. Some developers in Chongqing are
working with the local government to ride out the real estate
downturn. In contrast, developers in Chengdu who have seen
substantial depreciation of their undeveloped land are
reportedly forfeiting deposits and returning the property to the
local government. The Sichuan earthquake itself has apparently
not had a significant effect on real estate prices. End summary.

A Downward Trend in the Market

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3. (SBU) Contacts in Chengdu and Chongqing recently told
Congenoff that land prices in both cities started declining in
October 2007. Che Yong, the chairman of a Chengdu-based real
estate firm, said that in some areas prices for land in the city
had declined by 50 - 66 percent over the past year. David Wong,
the managing director of a real estate firm in Chongqing, also
saw land prices declining in Chongqing. He said that the
declines were not as great as those in Chengdu, but he did not
quantify the reduction in value.

4. (SBU) Che and Wong both noted that new and existing home
prices in their respective cities had declined over the last
year, leading to many special offers by builders.
Advertisements in a major Chongqing newspaper, Chongqing
Commerce News (Chongqing Shangbao), offered additional square
footage at no additional cost or rebates of up to 25 percent of
the sale price that could be used for furnishing and decorating.
In a major Chengdu newspaper, Western Municipal News (Huaxi
Dushi Bao), a builder offered 33 percent discounts in late
October 2008, while another offered three bedroom houses for the
price of two. Wong and Che also said that in addition to price
cuts on newly-constructed homes, the prices of existing homes
were also declining.

Tighter Regulations, Not Quake, Depress Real Estate Sales

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5. (SBU) Central government regulations making it more difficult
to buy a second home were cited by both Che and Wong as an
important factor in the declining price of housing. In
September 2007, Beijing implemented regulations that increased
the down payment requirements and interest rates on loans for
the purchase of second homes. Government officials at the
Chengdu Real Estate Transaction Center (CRETC) said in
mid-October of this year that the measures were intended to
reduce the speculative inflows of money from outside the city.
None of the real estate experts we interviewed, however,
believed that the 12 May earthquake in Sichuan had played a
significant role in the declining price for newly-built homes.

6. (SBU) Existing home prices are suffering because of financing
requirements as well. Buyers of a previously purchased home can
only finance 70 percent of the value of the home, as opposed to
80 percent for new construction, according to Wong. Buyers may
also receive higher interest rates on loans for existing houses,
further reducing incentives to buy older homes. Che said that
about 85 percent of home buyers in Chengdu rely on bank loans to
purchase a home.

Reaction from Developers

CHENGDU 00000241 002.2 OF 002

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7. (SBU) In Chengdu, Che said that developers who purchased land
at elevated prices have subsequently seen a significant loss of
market value. Some developers are simply walking away from the
property and forfeiting deposits paid to purchase the land
rather than start construction and risk uncertain financial
returns on their investments. In these instances, the land
returns to the government. Wong said that the Chongqing
government is working with developers to help them to hold on to
their property. Chongqing is providing extended repayment terms
for developers who are unlikely to realize profit on their
investment over the next 2-3 years. Wong did not provide
specific examples of how this is being done.

8. (SBU) Developers are also looking to joint venture partners
to obtain the capital needed for development. Developers are
prohibited from using land as collateral for construction loans,
even if the land is wholly owned by the developer, said Wong.

The Road Ahead for Chongqing and Chengdu

--------------------------------------------- ----

9. (SBU) Che said he was pessimistic about the outlook for the
Chengdu housing market over the next 3-5 years. He noted that
global economic conditions would certainly have a negative
impact on Chengdu's real estate sector. Officials at CRETC also
suggested that the housing market might decline further,
although they did not say when the market might bottom out.
Declining land and home prices could also squeeze local
government budgets. Both CRETC and Wong said that housing is an
important source of local government revenues. Property-related
taxes account for about 25 percent of Chongqing's revenue,
according to Wong. The owner-occupancy rate is another factor
that may affect the outlook for real estate in these two cities.
Chongqing housing is 90 percent owner-occupied, but the rate in
Chengdu is only 54 percent, according to Wong.

10. (SBU) Comments: Real estate and related development
projects have played a notable role in the economies of Chengdu
and Chongqing in recent years. In addition to serving as a
source of employment for thousands of laborers from neighboring
rural areas, the real estate sector has brought in foreign
investment as well. For example, we understand that Singapore
firms have invested almost USD 600 million in real estate and
commercial development projects in Chengdu. For local
officials, some of whom have openly expressed their concerns to
us about potential problems caused by unemployed Sichuan and
Chongqing workers returning home from coastal factories,
problems in the real estate sector are a very unwelcome headache.
BOUGHNER

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