China orders six provinces to rethink housing pre-sale rules: document

[BEIJING] Six Chinese provinces have been told to consider a property pre-sale system that enables developers to secure funds before project completion and decide whether it should be scrapped or retained, a housing ministry document seen by Reuters said.

Under the system, developers can apply for a pre-sale permit to begin sales even if they have only made a fraction of their total investment in the project.

A termination of the system would be a sign of government intent to tighten developer financing amid a multi-year government crackdown on financial risks.

The ministry issued the document instructing local housing bureaus of Hubei, Sichuan, Jiangsu, Henan, Guangdong and Liaoning provinces to make an "in-depth" study of the pre-sale system, and set out reasons why it should be retained or scrapped.

"If the pre-sale permit (system) is advised to be maintained, or if the requirements for pre-sale permits should be raised, thorough arguments supporting its legitimacy and necessity should be given," the document said.

"If it is advised to be scrapped, supervision measures should be studied accordingly at the same time."

The housing ministry was not immediately available for comment out of business hours.

Developers in China typically use the pre-sale proceeds from their property projects to repay any related construction financing.

Chinese developers raised 3.5 trillion yuan in sales deposits and pre-sale funds in the first eight months of the year, up 15.1 percent year-on-year, official data showed.

China has seen a property boom since early 2016 and authorities are still struggling to tame the sizzling market as the buying frenzy spilled over to less-regulated smaller cities.

New home prices accelerated in August at the fastest pace in nearly two years, a sign that Beijing's efforts to boost a slowing economy may once again be heating up frothy real estate markets.

"If you look at practices in other countries, it's definitely a trend to cancel the pre-sale system and it's an important measure to lower the leverage in the property sector," said a developer who requested anonymity as the subject was sensitive.

The provinces were asked to report back to the ministry by Sept. 15. The ministry also asked them to study and provide feedback over the management for registrations of real estate appraisal agencies.

In a separate document seen by Reuters, the Guangdong Real Estate Association said the local housing bureau was set to propose gradually phasing out the system, in materials planned to be submitted to the Housing Ministry on Sept 25, saying it had led to "high leverage" risks.

REUTERS