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Why China's real estate market is declining.
SOHO China Ltd., Beijing's largest real-estate developer, reported a 65 percent decline in first half net profits, because it completed fewer projects than expected, which caused its stock to tumble nearly 5.5 percent.
But what jumped out was the company's decision to switch its business model to "buy-hold," from "buy-sell." The company said this switch was motivated by its attempt to "capture the huge growth in rental and value for prime office buildings in Beijing and Shanghai.
Moreover, the company acknowledged that the Chinese central bank's interest rate cut and the changes to its deposit rate had helped transaction volume but that "the spring for the real estate industry is yet to come."
"The People’s Bank of China lowered the reserve requirement ratio twice during the year and, after three and a half years, it lowered the RMB benchmark deposit and loan interest rates of financial institutions twice, in June 2012 and July 2012, respectively.
The lowering of interest rate in July 2012 was the first time of asymmetric interest rate cut by the central bank in recent years. In addition, certain supportive policies have been launched by individual local government authorities. As a result, the transaction volume of real estate market has been improved since March 2012.
However, control on real estate sector and developers, and especially the determination and policies of the central government, have not yet been loosened. Liquidity loosening and improvement of transaction volume did not fundamentally ease the capital pressure of real estate developers. The spring for the real estate industry, especially for residential developers, has yet to come."
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