Chinese Developers Offer Home-Buyback Guarantees As Komatsu Warns Construction Is Slumping

Tyler Durden's picture




 

You know it's bad when... Property developers in two of China’s weakest housing markets are offering to buy back homes in the future above the purchase price in a desperate effort to boost sales as demand slumps. As one analyst understatedly notes, "obviously they’re relatively cash-thirsty," but are under massive pressure not to reduce prices for fear of the signal it would send (that losses were possible). This 'fear' is echoed loudly by the CEO of Komatsu (the world’s second biggest maker of building and mining equipment) who saw said sales in China are falling more steeply than anticipated (20% below expectations) and warned "the impact of China is big."

 

As Bloomberg reports,

China’s home sales slumped 10.2 percent in the first five months of this year from the same period a year earlier amid tight credit and an economic slowdown, reversing last year’s 27 percent jump.

 

The average new-home price in 100 cities tracked by SouFun Holdings Ltd. fell 0.5 percent in June from the previous month, accelerating from the 0.3 percent decline in May that ended 23 consecutive months of gains.

But the bursting of the bubble has led developers to desperate actions...

In Hangzhou, where home prices fell the most in May among 70 Chinese cities watched by the government, Shanheng Real Estate Group is giving homebuyers an option to sell back their apartments in five years for 40 percent above the purchase price.

 

In Wenzhou, DoThink Group is offering to repurchase homes at three of its projects for 120 percent of the purchase price after three years.

 

The offers are the latest strategy by developers across China, including reducing prices, delaying project launches and offering incentives to potential buyers, as they seek to maintain sales targets.

It appears to not be working...

Prices of new homes fell in May from April in half the 70 cities tracked by the government, the largest proportion since May 2012, according to government data. A more persistent and sharper downturn in the property sector is the biggest risk for China’s economy in the next couple of years, according to UBS AG.

 

“Obviously they’re relatively cash-thirsty,” said Dai Fang, a Shanghai-based analyst at Zheshang Securities Co.

And that is borne out by the derivative players of this collapse - Komatsu’s China sales in the two months were about 20 percent lower on the previous year...

Komatsu, the world’s second biggest maker of building and mining equipment, said sales in China are falling more steeply than anticipated, joining larger peer Caterpillar in flagging fraying Asian demand.

 

Komatsu’s sales in China, where economic growth is slowing, dropped dramatically in April and May and it will probably miss its annual target for the nation, Chief Executive Officer Tetsuji Ohashi said in an interview, citing delays to the start of some construction projects.

 

...

 

As a seller of equipment to both mining and construction companies, Komatsu is particularly vulnerable to fading growth in China, the world’s second-biggest economy and its biggest buyer of raw materials.

 

“Since the impact of China is big, we will closely monitor the situation,” Ohashi, 60, said at the company’s Tokyo headquarters last week.

*  *  *

But, but, but the PMIs are at multi-month highs so it all must be great right (oh aside from the lowest employment in 8 months)

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Wed, 07/02/2014 - 20:45 | 4919817 Glass Seagull
Glass Seagull's picture

 

 

Lehman did this with some seaside condos in florida near the top if i recall correctly. 

Wed, 07/02/2014 - 21:07 | 4919876 max2205
max2205's picture

When is this shit gonna finally gonna blow the fuck up

Wed, 07/02/2014 - 21:31 | 4919934 BurningFuld
BurningFuld's picture

It just started in China. This is going to be epic! One for the record books.

Wed, 07/02/2014 - 21:52 | 4920009 NoDebt
NoDebt's picture

What matter isn't the "economy" (if there is such a thing), it's banking contagion.  Watch Japan.  It's the sickman of Asia and all the banks are tied into it wordwide.  If Japan goes down, it's gonna ripple across the ocean(s) in about 3 nanoseconds.

Thu, 07/03/2014 - 06:14 | 4920762 tonyw
tonyw's picture

Any guarantee is only as good as the counterparty standing behind the guarantee.

What are the odds on these companies being around in five years time?

In the meantime the execs will get their bonuses or even just keep their jobs, better then going broke today.

 

Wed, 07/02/2014 - 20:55 | 4919844 frankTHE COIN
frankTHE COIN's picture

Whoever requests a Buyback will mysteriously disappear.

Wed, 07/02/2014 - 20:56 | 4919848 i_call_you_my_base
i_call_you_my_base's picture

This has to be your very last option.

Wed, 07/02/2014 - 21:04 | 4919871 SweetDoug
SweetDoug's picture

'

'

'

Rot'sa ruck getting that warranty option covered in 3 years…

 

•?•
V-V

Wed, 07/02/2014 - 21:21 | 4919912 pakled
pakled's picture

World to Chinese housing market:

 

Dude, you're gettin' a dilemma

Wed, 07/02/2014 - 21:24 | 4919922 NoWayJose
NoWayJose's picture

Buying back at 20 to 50 % higher in a few years is not a sustainable business model. I would doubt that any such company would still be in business when the buy back time comes.

Wed, 07/02/2014 - 22:00 | 4920034 logicalman
logicalman's picture

It's called PANIC.

Wed, 07/02/2014 - 23:03 | 4920187 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

I would doubt that any such company would still be in business when the buy back time comes.

Salesman lie about something? Never! Of course they know what is going down.

Wed, 07/02/2014 - 21:43 | 4919986 ghostzapper
ghostzapper's picture

Are they extending this offer to the 49 million empty units never occupied upon completion?

If so, booooyahhhh! I'm in.

Wed, 07/02/2014 - 22:12 | 4920058 Leraconteur
Leraconteur's picture

That figure used to be 65 million. So they are being occupied.

Wed, 07/02/2014 - 22:29 | 4920104 ghostzapper
ghostzapper's picture

I could be off. Let's call it a shitload.

Thu, 07/03/2014 - 00:48 | 4920409 Zeta Reticuli
Zeta Reticuli's picture

Pew Research did the most exhaustive study of the residential vacancies in China, and came up with a figure of 15%. Considering that the US figure is 10% and that many Chinese families hold empty units for their children for many years or just as an investment, it's no big deal. Vacant does not always mean unsold or foreclosed, as in America. There is no property tax, so an empty unit can be held for decades with litle overhead.

Wed, 07/02/2014 - 21:55 | 4920018 Zoomorph
Zoomorph's picture

Not inflation-adjusted. :-)

Wed, 07/02/2014 - 21:59 | 4920030 logicalman
logicalman's picture

What's that thing about un-sustainable systems again?

 

Wed, 07/02/2014 - 22:10 | 4920057 Leraconteur
Leraconteur's picture

The Chinese dont like price discovery except labour - that approaches zero. But assets never go down.

Wed, 07/02/2014 - 22:27 | 4920097 Spungo
Spungo's picture

They went full refund. Never go full refund.

Wed, 07/02/2014 - 23:14 | 4920211 jez
jez's picture

As one analyst understatedly notes, "obviously they’re relatively cash-thirsty,"

=================================

The crazy things that kids say nowadays! I don't know where they get it from!

 

I wonder why it's "cash-thirsty" rather than "cash-hungry". Because cash is "liquidity", I suppose.

 

But why not just say, "desperate for cash"? If that's what you mean. Or "almost broke". Or "currently experiencing a slight embarrassment in the available funds department".

 

And why "relatively" cash-thirsty? Relative to what?

Thu, 07/03/2014 - 00:59 | 4920426 iLiquid
iLiquid's picture

Relative to their debt-servicing obligations.

Thu, 07/03/2014 - 00:58 | 4920425 iLiquid
iLiquid's picture

In China almost all homes are pre-sold at full price.  The buyer must pay the full money for the house yet to be built, by either cash or mortgage loan.  Before completing the house (in several years), the developer essentially uses the full money for free.

I'd say the value of this free (as in zero-interest) money far exceeds this buyback option.

Thu, 07/03/2014 - 02:33 | 4920544 Magooo
Magooo's picture

THE PERFECT STORM (see p. 59 onwards)

The economy is a surplus energy equation, not a monetary one, and growth in output
(and in the global population) since the Industrial Revolution has resulted from the
harnessing of ever-greater quantities of energy. But the critical relationship between
energy production and the energy cost of extraction is now deteriorating so rapidly that
the economy as we have known it for more than two centuries is beginning to unravel.
 

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

Thu, 07/03/2014 - 02:35 | 4920550 Magooo
Magooo's picture

THE PERFECT STORM (see p. 59 onwards)

The economy is a surplus energy equation, not a monetary one, and growth in output
(and in the global population) since the Industrial Revolution has resulted from the
harnessing of ever-greater quantities of energy. But the critical relationship between
energy production and the energy cost of extraction is now deteriorating so rapidly that
the economy as we have known it for more than two centuries is beginning to unravel.
 

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

Thu, 07/03/2014 - 11:49 | 4921661 ZackAttack3
ZackAttack3's picture

Hoep the Chonese do not fall for this.  Either the economy will be solid in 3 years and there will be no need to buy back or the economy will be terriblw and the comapny will file for bankruptcy, thus making them not have to buy any houses back.  Sounds great but its just a win-win for them and not the buyer.

Thu, 07/03/2014 - 11:48 | 4921662 ZackAttack3
ZackAttack3's picture

Hoep the Chonese do not fall for this.  Either the economy will be solid in 3 years and there will be no need to buy back or the economy will be terriblw and the comapny will file for bankruptcy, thus making them not have to buy any houses back.  Sounds great but its just a win-win for them and not the buyer.

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