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Developers' cashflow squeezed as Shenzhen tightens rules

Property cooling measures leave developers with fewer units they can sell; Logan Property could be hit hard

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Logan Property Holdings' Logan Carat Complex in Shenzhen. Analysts say the tightened rules could curb speculation in the short-term, but prices could still rise in the longer term when demand goes up.

Hong Kong

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.

For example, Logan Property, Shenzhen's top seller last year - could see its saleable assets decline by as much as 20 per cent.

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.

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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.

Li Juming, Shenzhen general manager of realtor Hopefluent Group's China unit, said: "Some developers have been working on these projects for five to six years and still haven't got the contract for land-use rights.

"The new measure will make industrial redevelopment more difficult. In the past developers could use 30 per cent of the land to build apartments for sale. But now they can't sell anymore and these properties become illiquid assets that are unable to generate cashflow."

Logan Property is among those that could be hit hard. The company has around 40 per cent of its original saleable resources in Shenzhen, according to its 2017 earnings conference in March.

Logan includes redevelopment projects in its 519 billion yuan (S$105.1 billion) landbank, and most of its landbank in Shenzhen is in industrial renewal projects - which have yet to start the formal regeneration process - contributing around 100 billion yuan to the total, said a company source 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 per cent of its saleable assets may not generate sales as expected.

Kaisa Group and Shenzhen Investment, 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.

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 Mr Li said. REUTERS