Real estate special: the medicine is working

SouFun, which is China’s largest real estate website owner, has reported that home prices in June eased in 8-out-of-10 of the Nation’s largest cities, month on month (only Hangzhou and Tianjin were exempt). That said, 75 out of the 100 cities surveyed reported higher prices; and, nationally, house prices rose 0.4% in June, month on month, and by 5.2% year-on-year.

In part, this reflects Government action to restrain the real estate sector, generally, and residential, in particular. For example, this year it has raised down payment percentages to 30% on first homes and 60% on second, introduced mortgage requirements and imposed purchase restrictions and taxes in some cities. The PBOC has also raised interest rates four times since October (when it increased borrowing costs for the first time in three years).

CICC commented that “price growth in big cities slowed, but it takes time for a nationwide adjustment. The situation with a shortage in housing supply is just gradually improving”.

Turning to a quarterly opinion poll by the PBOC’s Beijing branch, some 65% of residents expected the Government to enact further property tightening measures, including further increases in down payments and mortgage rates. In addition, some 60% of respondents also said they had postponed home purchases as they expect prices to fall. I am sure that this and other more alarming statistics - in Curate’s egg veracity - are correct in certain parts of the Country. Nonetheless, I also think that many of us Western commentators fail to fully appreciate the scale, range and diversity of the Chinese market (and psyche). We also externalise our own residential market dynamics. Added to the mix, is a (short-sighted) cynicism of the Chinese Government’s economic management.

Sure there are over-heated pockets within the myriad of markets which comprise the Chinese housing sector. There are also areas of dramatic over-supply (which is largely a cultural thing). But, for my money the Government is doing the right thing; and it will enact a cure not a fatality.

Check out, too, the property sub-sector within the Shanghai Composite which is now 10.2% to the good in 2011 to date, in a wider equity market off 1.7% (as at 1 July). Elsewhere, too, a developer paid Yuan 710 million for a 6,030 square metre plot in Beijing.

Daiwa Capital Markets also sees no signs of a hard landing for China’s real estate market. It points out that gross floor area sales and average selling prices for residential property rose modestly in the first five months of 2011. “We expect valuations to improve amid continued improvements in major developers’ contract sales. We recommend that investors take advantage of any further sector weakness to accumulate holdings”. It adds, too, that M&A activity will increase and that a number of small-and mid-cap listed Chinese property developers may go private. Earlier this year, for example, Fosun International, the parent of Shanghai Forte Land took the Company private paying a 30% premium for the privilege. And, more recently, Gemdale agreed to buy a 62% stake in Chi Cheung Investment Company from Billion Up, a unit of Chinese Estates Holdings, for $107 million.

The UK-based property investor Grosvenor is also shifting the focus of its portfolio to China and has invested up to £1 billion in residential property projects in China and other core areas.

In the affordable homes sector, where the Government has pledged to build 36 million homes over the next five years (at an estimated cost of more than $619 billion), there is more mixed news. But, that most precious of beings, the Government’s reputation is at stake. My money is on the Government (even with its new leaders who are to be elected next year).

“Physician, heal thyself” - King James Bible

HEADLINES

MARKET
• Home prices in June ease in 8-out-of-10 largest cities, says SouFun; and nationwide prices rose 0.4% in June, month on month, and 5.2% year-on-year
• China’s local governments may loosen property constraints in order to ease debt burden; National Audit Office puts borrowings at $1.7 trillion (December 2010)
• Buy small and mid-cap developers before they go private, says Daiwa; which also sees no hard landing for real estate
• Further tightening expected and house price falls, says PBOC poll in Beijing
• Yuan 710 million paid for 6,030 square metre plot in Beijing
• NRDC fines 12 developers Yuan 3.6 million for breaking new rules

COMPANIES
• Developer Gemdale buys 62% in rival Chi Cheung for $107 million
• Grosvenor bets on residential sector in China

AFFORDABLE HOUSING SECTOR
• Only 30 of China’s top 100 property firms participated in affordable homes scheme 2007 through 2010, says Housing Ministry
• Trust funds for affordable housing are set to surpass Yuan 10 billion this year
• Finance Ministry will make a 2011 maiden issue of Yuan 50.4 billion in bonds on behalf of 11 local governments to support the construction of affordable housing
• China’s State Audit Office uncovers misuse of funds in the affordable housing programme

HONG KONG
• Hong Kong’s annual anti-Government rally over home prices draws thousands; and it resulted in more than 200 arrests