Real Estate Developers, Strapped for Cash, Resort to "Irregular" Tactics

By CSC staff, Shanghai,Published:July 28,2009 While the real estate market appears to be is in the midst of a boom, defaults among developers are also beginning to rise. Small and medium developers are resorting to faking sales to get bank loans to relieve their funding pressure. Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the "boom" of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts. Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. "In fact, it is still difficult for small and medium developer to get credit support from banks," said a sales manager of a medium real estate company. Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. "There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract," the sales manager added. In 2008, when credit was tight, many small and medium developers sought to gather money in this way. "Every developer is doing this. The only differences are scale and method," said the sales manager. The high housing contract cancellation rate has also occurred in Nanjing. July statistics show, in one housing project alone, 29 deals being cancelled. In Beijing, the cancellation rate in some housing projects has reached 40% or higher. According to figures from Centaline China Property Research, between January and June new residential housing sales in six key cities totaled 55 million square meters, up 88% over the second half of 2008. However, since May, trends for residential sales in the six cities began to diversify. In June, housing sales in Guangzhou, Shenzhen, and Tianjin all saw a decline, but Beijng and Shanghai were still seeing month-on-month growth. Housing sales in Shanghai in June reached 2.84 million square meters, up 6%, month on month, the highest among all the six cities. Yin Bocheng, director of the Real Estate Research Center of Fudan University, thinks the boom is a mirage. "This is only fake prosperity." This ploy has been used before to simulate growth in the real estate market. Developers getting bank loans with fake deals will add to credit risk in a long run.