Developers' cashflow squeezed as Shenzhen tightens rules on serviced apartments

Hopefluent group

15/08/2018 03:07

* Shenzhen bars sale of newly approved business apartments
    * Measure aims at boosting rental supply
    * Some of current 600 urban renewal projects affected 
    * Logan Property's saleable assets seen down as much as 20
pct

    By Clare Jim
    HONG KONG, Aug 15 (Reuters) - New tightening measures
imposed on business apartment developments in Shenzhen, China's
Silicon Valley, could seriously undermine some developers'
cashflow as they find they may have fewer saleable assets than
anticipated.
    Logan Property  3380.HK  for example, Shenzhen's No.1 seller
last year, could see its saleable assets decline by as much as
20 percent. Logan's first-half financial results are due on
Wednesday afternoon local time.
     Investors have favoured serviced apartments and homes built
on land designated for commercial use to avoid purchase
restrictions because such accommodation is not subject to the
same rules as residential property.  
    In late July Shenzhen barred developers from selling newly
approved apartments, allowing them only to rent them out, and
restricted buyers from reselling their apartments for five years
from the date of obtaining their deeds. 
    To further curb speculation - although the city has already
seen a drop in home prices due to stringent price caps on new
developments - the local government imposed sales restrictions
on business accommodation to limit the turnover rate and boost
rental housing supply.
    Shenzhen attracts large numbers of highly skilled technology
professionals each year, creating acute housing demand in the
face of limited land supply.     
    The Shenzhen government said in June that it aimed to
increase housing supply by 1.7 million units by 2035 to satisfy
anticipated population growth of 5.5 million.  
    Given the lack of vacant land, the tech hub has been relying
on urban regeneration to create new housing supply, but some of
the 600 current redevelopment projects will be affected because
the new measures apply to all those which have yet to gain
official approval under the regeneration plan, market analyst
said. 
    "Some of the developers have been working on these projects
for five to six years and still haven't got the contract for
land-use rights," said Li Juming, Shenzhen general manager of
realtor Hopefluent Group's  0733.HK  China unit. 
    "The new measure will make industrial redevelopment more
difficult. In the past developers could use 30 percent of the
land to build apartments for sale. But now they can't sell
anymore and these properties become illiquid assets that are not
able to generate cashflow."
    One company that will be hit hard is Logan Property, which
has around 40 percent of its original saleable resources in
Shenzhen, according to its 2017 earnings conference in March.
    Logan includes redevelopment projects in its 519 billion
yuan landbank, and most of its landbank in Shenzhen is
industrial renewal projects - which have yet to start the formal
regeneration process - contributing around 100 billion yuan to
the total, a company source said, who declined to be identified 
because he was not authorised to speak to the media.  
    As Logan will not be able to sell the apartments when they
are finally completed because of the new measures, up to 20
percent of its saleable assets may not generate sales as
expected.
    Kaisa Group  1638.HK  and Shenzhen Investment  0604.HK , two
other Shenzhen-based developers that have a number of urban
renewal projects in the city would also be affected, although
their land banks have more residential land than Logan. 
    Logan declined to comment while Kaisa said it had no related
information.
    Shenzhen Investment said it did not include business
apartments in its current land bank, but there would be an
impact on future renewal projects and it planned to adjust its
business strategy to better fit the policy change. 
    Property agents said it was still unclear how the latest
tightening measures would affect impact business apartment
prices in Shenzhen.
    The five-year restriction on reselling could dampen
speculative demand, but it could also eventually drive prices up
if real demand expands and there is little new supply. 
    "Skilled migrants into the city will eventually want to buy
a property because there's a serious under-supply, so we view
this measure as positive to business apartment prices in the
long run," Hopefluent's Li said.

 (Reporting by Clare Jim; Editing by Eric Meijer)
 ((clare.jim@thomsonreuters.com; +852 2912 6653; Reuters
Messaging: clare.jim.thomsonreuters.com@reuters.net))