Loss aversion angst grips Chinese developers as Australian housing market fades


Chinese developers who arrived late to the fading Australian housing boom are faced with a curious choice: is it better to cut losses on investments that have turned sour or ride out the slump in the hope of an eventual recovery?

One option is take the loss upfront by unloading land to other developers, a move seen as appealing to smaller developers who lack the financial firepower to wait it out in expectation of an eventual recovery.About a half-dozen Chinese developers have expressed a willingness to sell their land holdings, according to Carrie Law, CEO and director of Juwai.com, a real estate portal for Chinese buyers.

The decline in the Australian property market has been particularly hard on Chinese developers with holdings in remote Western Sydney, including those with small projects of less than 50 units.

"They paid too much for the land, know too little about building. It's cheaper to sell now and lose a little money than it would be to go forward with construction and lose much more money."


But most Chinese developers who bought near the peak in late 2016 to 2017 are in a position to hold in the hope that the market will eventually recover.

"A few exceptions are those who bought land expensively with borrowed money," Danny Shi, head of Asian Services Desk, New South Wales, CBRE, said. "For those who borrowed at a double-digit interest rate the situation is really burning. Even if they take a loss, there might be no buyer."

After a six year bull run, the housing market in major cities in Australia entered a correction phase last year. On a nationwide basis, prices retreated 1.9 per cent in 2018, while Sydney has seen a sharper decline of 14 per cent from its 2017 peak.

Last year mainland developers and investors channelled A$1.3 billion (US$929.2 million) into the Australian residential property market, reflecting a decline of 34.5 per cent from 2017, according to Knight Frank.

Slowdown in Australia's property market won't dampen Chinese investor interest

"Those Chinese developers who bought development sites before the peak in the market in well-located positions still can sell at a premium price, even if they choose to sell these sites because they can't wait," said Michelle Ciesielski, director of research & consulting, Knight Frank Australia. "Many Chinese developers want to hold onto their projects until the market recovers, especially those who bought at the peak of the market."

Larger Chinese developers might be able to grow their presence at the expense of their smaller mainland counterparts as the downturn gathers pace, according to Darren Xia, head of International Capital Markets, North Asia, at JLL.

"There is a great disparity among Chinese developers. Some have built a strong local presence with a localised model, established staffing with a mix of local and international experience, and intend to expand fast. They have been acquainted with local rules and differ little from local players," Xia said

In a sign that they plan to be around for the long haul, existing Chinese developers are diversifying by increasing their exposure to offices and lower-density residential assets.

"Three years ago residential construction sites could be found all over Sydney, with many developers undertaking office conversions to apartments. The latest trend is an increase in commercial offices development and refurbishment," Xia said.

He said mainland developers were more willing to embrace local expertise such as advisory firms, a shift from early days when many distrusted local agencies.

"Despite the current downturn, we're happy to see Chinese developers go global, not just to Australia. Globalisation can help them to overcome the limits of China market and learn best practices of each market," he said.

Despite the recent setback, Chinese developers and investors bought 31 per cent of land sites sold in Australia last year, slightly down from 33 per cent in 2017.

Chinese companies account for 15 per cent of all flats under construction this year in Sydney, Melbourne and Brisbane. By 2021 mainland developers will account for 22 per cent of all flats under construction in the three cities by 2021, according to Knight Frank.

"When I speak to Chinese developers, almost all of them tell me they plan to operate across Australia for many generations to come --building apartments for their grandchildren's children," Ciesielski said.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.


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