China property firms weigh cutting home prices after Evergrande's deep discounts

[HONG KONG] Country Garden, China's top property developer, and smaller real estate firms are weighing offering bigger discounts on home buys after rival Evergrande unveiled its steepest discount this week, analysts and a source said.

Evergrande, China's second-biggest property developer, announced a nationwide 30 per cent discount on all of its properties until the end of the week-long holidays in early October, a period that is traditionally China's peak home buying season.

The move is aimed at juicing sales and cash flow at China's most indebted developer at a time when its profits have weakened.

Steeper discounts from developers come against the backdrop of a sluggish recovery in home prices in smaller cities and ebbing appetite for property market speculation outside major cities due to uncertain economic conditions.

A Country Garden source said the company is planning to launch a campaign in response to Evergrande's price cut, but the rate of discount may be lower.

The person, who asked not to be named because the plans are yet to be finalised, added it is not unusual for the company to introduce promotions in September and October.

Country Garden did not immediately respond to a request for comment.

The developer and Evergrande have similar project footprints in the country, focusing on tier-3 and 4 cities and peripheral locations in bigger cities.

Other major developers told Reuters they won't offer across-the-board or steep discounts to compete with Evergrande because their projects are in very different locations and the bigger cities are selling well.

According to data of 18 major cities real estate researcher CREIS tracks, home transactions in August rose 3.4 per cent from July, and 26.7 per cent from a year ago.

"Developers will face pressure; they're watching closely, but it'll be mostly those who have projects next to Evergrande's only," said Andy Lee, realtor Centaline's South China chief executive officer.

"Because a 30 per cent discount basically wipes out all the profits; it's mostly for driving sales volume."

HIGH DEBT LOAD

Previous discounts have come at a cost to Evergrande's margins. Last week, it posted a 37 per cent slump in first-half core profit despite a 24 per cent increase in sales.

Its total borrowings climbed 2.7 per cent during the period to 835.5 billion yuan (S$166.95 billion). The company has targeted sales of 800 billion yuan in 2020.

Matthew Chow, a director at rating agency S&P Global, said Evergrande's deep discount offer is likely to be "company specific" because it has short-term debt obligations coming due.

"Evergrande relies a lot on its cash generation to tackle all the upcoming obligations; sales is obviously one of Evergrande's key cash inflow," Mr Chow said.

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