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Property

Chinese developers slash prices as economic outlook dims

Investors dump shares as trade war with US bites

HONG KONG -- China's three-year property boom appears to be running out of steam as some of the country's biggest developers slash prices amid a dimming economic outlook.

After Country Garden Holdings, China's largest property developer by sales, reportedly cut prices by up to 30% over the weeklong national holiday last week, angry buyers who paid the full price smashed the showrooms of one of its property projects in southern Jiangxi Province, demanding a refund.

The Hong Kong-listed developer lost almost 10% of its share value in the past two days, closing at 8.93 Hong Kong dollars on Tuesday.

While Country Garden called the big discounts "regular marketing activities" for the holiday seasons, analysts believe more property developers will make similar moves in the coming months to encourage sales.

"It is the beginning of a new round of price correction," said Alan Jin, head of property research for Asia excluding Japan at Mizuho Securities. He said the decline could be more severe than the previous round in 2014, when prices in 100 cities tracked by China Real Estate Index System dipped 2.7% from a year ago.

He said sharper price increases over the previous three years and much deeper economic troubles in China spurred by a trade war with the U.S. will contribute to a bigger decline in property prices.

Jin also warned fears can spread fast among investors once more developers offer promotions. "People will become less interested in purchasing when everyone is offering big discounts," he said, leading to smaller transaction volumes and lower prices.

Country Garden is not the only Chinese developer who has slashed prices. Earlier this year, China Evergrande Group, the country's second largest developer said it will give 12% discounts to buyers in selected cities. China Vanke, the third largest, last week cut prices by 36% on luxury villas it built in the southeastern city of Xiamen where housing prices almost doubled in the past three years.

"Currently, people are very pessimistic on China's economic outlook. This naturally reflects on property market," said Carol Wu, head of China and Hong Kong research at DBS Vickers.

Buyers at lower-tier cities could see bigger discounts compared with mega cities like Beijing and Shanghai, she said, due to more supply.

While Wu expects more homebuilders to offer promotions in the near future, she said developers would act in a low-key manner so they don't dampen market sentiment.

"Unless China rolls out big incentives, we are bearish on the short-term outlook," she said.

Buyers also seem indifferent to good news, especially so when the future is uncertain, David Hong, head of research at consultancy China Real Estate Information warned.

Last week, People's Bank of China cut reserve requirement ratios for most commercial banks, freeing up more than $100 billion of capital. While cash injection to the banking system is usually good news for the property sector, Hong said some anxious buyers and investors are interpreting it as a sign of a further deterioration of the economy. "It proved that the economic situation in China is very bad," he said.

So far this year, property stocks have underperformed. Country Garden shares are down 44.9% this year, while Vanke and Evergrande fell 33.0% and 25.0%, respectively.

However, Nicole Wong, head of property research at brokerage CLSA, said that property can make good investments in an economic downturn.

"China's property space often offers the best risk-reward when news is gloomy," she wrote in a recent research note. "If the impact of the trade war worsens, the property sector remains one of the best ways to absorb job losses in the manufacturing and export sectors."

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