Real estate special (July No. 2): no one is going to crash and burn

'Top Gun' - Paramount Pictures (1986)

Kelly McGillis: “I’m Charlotte Blackwood”
Tom Cruise: “I’m Maverick”

KM: “Did your mother not like you?”
TC: “No, it’s my call sign”.

KM: “You're a pilot?”
TC: “That's right. A naval aviator”
TC: “Actually, we’ve only done this twice”
KM: “How did you do?”
TC: “Crashed and burned on the first one”
KM: “And the second?”
TC: “I'll tell you tomorrow but it’s looking good so far.

A soft landing for the real estate sector in China is being predicted (empirically) by Stephen Green, Senior Economist at Standard Chartered (SC). This follows an exclusive survey of developers and - when Green was asked on CNBC TV: “so no one is going to crash and burn?” - he said “not so far”.

This call is also made despite rising inventories of houses in 35 Chinese major cities, exacerbated by an increasing land supply (a Government measure to cool house price inflation). In fact, SC says inventories in these cities started to turn positive in Q3 2010 and currently stand at about three months worth of supply; levels not seen since the bottom of the market in 2008-09. “In the second half, assuming sales remain at the present level, we estimate an increase in inventories to seven months’ worth by year-end”.

China’s land prices, which have been falling, could come under further pressure too, according to the survey. It forecasts price cuts of up to 20% in many cities over the course of 2012 as Government’s measures also limit demand. But SC does not believe that rising inventories point to a collapse in China’s real estate market. “Developers are still building, which is good for growth; prices are stable, people are still buying which is good for the Government”; especially with 30% deposits from first time buyers. Indeed, while the survey showed that property sales in top tier cities halved to 12 million square metres in May from 20-25 million in 2009, some 130,000 new apartments were still being sold each month or an average of 4,500 a day.

Green also stressed that commercial building is set to rise over the next three months, according to at least half of the developers surveyed. Social housing is also pretty active and while, the Government’s 10 million unit target for the year will be missed, real estate construction could see a pretty strong second half and this will feed through to iron ore demand, copper etc, he added

Yes, property loan defaults are on the rise, says SC, according to a “significant minority” of developers. Similarly, smaller developers have been selling land and work in progress to other developers – which suggest they may be under some financial pressure. The large developers, however, are well funded. Indeed, bank lending to the Sector is still increasing and SC does not see a large number of bankruptcies i.e. no collapse. That said, developers told SC that they expected further tightening. However, the China Real Estate and Housing Research Association said it did not think the Government would take further steps at this point.

Elsewhere, China Real Estate Index System (CREIS), which is affiliated to Soufun, says that average land cost for residential use in 130 cities dropped 13%, in the January through June period from a year earlier, to Yuan 1,451 ($225) per square metre. This follows hot on the heels of Soufun, the Country’s largest online real estate firm, showing that transactions in residential land fell 6% in the first six months from a year earlier to 162 million square metres.

In reality, both lower prices and transactions have discouraged local government from selling land for residential use. This meant that the scale of transactions here declined by 15% in the first half from the same period of 2010 (to 195 million square metres), despite a quickened pace in June, added CREIS.

On a more positive note, China’s largest developers saw strong sales growth in the first half of this year, despite stricter government controls on the market. Combined sales of the top 10 developers leapt 80% year-on-year to Yuan 332.3 billion, according to data compiled by the China Real Estate Information Corporation (CREIC).

Finally, Wal-Mart, Ikea and other foreign retailers are now buying land in China for their new stores, instead of renting as they have done for 10 years or so. Wal-Mart, the World’s largest retailer, has bought sites in north eastern Dalian, while Inter Ikea Centre, the developer part-owned by Sweden’s Ikea, has invested $1.2 billion to build 510,000 square metres (5.5 million square feet). Ikea is the World’s largest home furnishings company. Cushman & Wakefield says that China is in the “era” for malls.

“I’m going to need a beer, to put these flames out...” - TC

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