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Axing home presales will push developers into corner

By Ye Tan (Global Times)

09:57, August 20, 2012

Earlier this month, rumors emerged that the government was considering forbidding property developers from accepting presales orders of housing units that were still under construction. The Ministry of Housing and Urban-Rural Development, the nation's top housing regulator, quickly refuted these rumors, but not before they had sent the prices of listed developers' stocks tumbling.

It's no wonder the market was so quickly swayed by these rumors, since there have been several official calls to ban home presales in recent years due to frequent allegations that property developers were delaying deliveries or thrusting poor quality units on presales buyers.

Yet, with China's property industry floundering thanks to government-imposed curbs meant to cool the real estate market, scrapping presales orders would be yet another nail in the coffin for many of the country's cash-strapped developers. Perhaps more importantly, such a ban would likely push developers who could survive such a ban to find ways to raise their home prices in order to offset the loss of their presales revenues, a situation which would run counter to the government's efforts in recent years to rein in home prices.

The policies Beijing has been rolling out since 2010 to bring housing prices to more reasonable levels has led to a slump in home sales for the country's developers, many of which were forced to turn to trust financing for funding to pay off their existing debts.

According to figures from UBS Securities Co Ltd, Chinese property developers will have to repay a total of 80 billion yuan ($12.57 billion) worth of trust financing in the fourth quarter of this year, a record sum and a huge increase from the combined 17 billion yuan in trust money local developers had to pay back during the same period last year.

Unfortunately for developers though, China's banking regulators moved to prevent trust firms from rolling over their loans to finance real estate projects at the beginning of this year, driving many property companies to turn to presales as one of their few remaining sources of funding for new projects.

In 2010, 39.1 percent of the capital developers invested in new construction came from presales, according to a report on China's property sector by Richlink International Capital Co Ltd, and this figure has been steadily climbing since then.

Without access to presales funding, many developers could be expected to cut corners on their current projects or break their contracts with presales buyers. Some developers may even take steps to hoard homes in order to raise prices through artificially manipulating supply pressures.

Rather than simply doing away with presales orders, and pushing developers into even more dire financial straits, which may result in unintended consequences for the market, the government should instead increase oversight on these orders to ensure that property developers are living up to their agreements.

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