With amphibious reptiles (aka alligators) nipping at his heels, it was difficult for the engineer to remember that his primary task was swamp drainage. Yeah, I know this is an old one; and a cliché. Nonetheless, with World stock and bond markets in turmoil (although not meltdown) and gold hitting a new record above $1680 - it is difficult to sustain focus on China's biggest single sector: real estate.
- New July house prices rise 0.2% (month); & 6.8% (year)
Average new home prices in 100 major Chinese cities rose 0.2% in July (June: 0.4%) from the previous month to Yuan 8,874 ($1,378) per square metre, which is the slowest growth in 11 months – and reflects Government controls. This is according to China Real Estate Index System (CREIS) and SouFun, the Country’s largest online real estate company. Year on year, however, the rise was 6.8% versus 5.2% in June. These data come ahead of the official Statistics Bureau release on the 18th of each month. CREIS added, too, that “some developers have started to cut prices quietly and more will do so in August; and, with supply rising in September and October, Chinese developers will face more downward pressure”.
Central government, thus far, has also been targeting property speculation in major cities, and these performed less well than smaller conurbations. For example, new home prices in the top 10 Chinese cities rose 3.9% in July from a year earlier (versus 6.8% overall), but stayed roughly the same month-on-month. Among the top 10, Guangzhou and Shenzhen led price rises in July, with annual growth of 10.1% and 10.0% respectively, while prices in Shanghai saw an annual decline of 0.1% (although month on month there was a gain of 0.4% on the CREIS scale; and 2.6% according to UWin to Yuan 22,051 per square metre).
Inevitably, perhaps, the Government has now begun extending control measures to second and third tier cities (in total this is reckoned to number about 40).
- Discounts more common
Amid heightened uncertainty, it is also widely reported that developers are either reducing selling prices or thinking about it. For example, China Overseas Land & Investment, Longfor Properties, Top Spring International and Country Garden, have been offering limited discounts in recent months. Meantime, County Garden sliced 25% off some units at Daya Bay in Huizhou, Guangdong. This means being able to buy for as little as Yuan 4,125 per square metre. Similarly, market leader China Vanke reduced prices by Yuan 5,000 per unit at 11 of its projects.
- Less land buying
Buying land has also become less popular and the Government failed to sell 353 parcels of land, including 163 pieces for residential development, at auction in the first seven months of this year. This is more than double the amount in the same period a year ago, according to Beijing Homelink Real Estate.
- Less cash
Funding is an issue too, especially for the smaller developers. In June, the China Banking Regulatory Commission (CBRC) told banks to reduce loans to property developers to avoid risks (following stress tests); and it is claimed in the marketplace that some banks stopped lending to the Sector altogether (that said, trust firms are reported to be lending at 20%; and in the unofficial ‘grey’ market rates are running as high as 40%).
In any event, H1 lending to real estate industry was down. For example, PBOC data show that new added loan growth in the period was Yuan 598.5 billion less than the growth volume in same period of last year. This means that China’s new lending to the real estate industry in H1 totalled Yuan 791.2 billion ($122.9 billion).
Almost counter intuitive, then, were comments from the CRBC Chairman Liu Mingkang who said commercial banks were capable of sustaining a 50% drop in housing prices (not everyone agrees).
- Hong Kong developers are coming
But it’s an ill wind…..and Hong Kong developers are increasingly looking to move in, as their PRC counterparts face difficulties, as outlined above (especially finance). These include Swire Pacific, which has just sold a mall in Hong Kong for $2.4 billion (its biggest ever deal) and is expected to spend much of this cash in China. It is already building five shopping malls and offices in China including in Guangzhou and Chengdu.
In addition, Hang Lung Properties said it has built up Chinese currency holdings of Yuan 20 billion ($3.1 billion) for PRC projects while Sun Hung Kai, the World’s largest developer by value, added almost 280,000 square metres to its China landbank in H2 2010, bringing the total to 7.6 million square metres. Similarly, Cheung Kong has almost 41% of its gross assets in Chinese cities outside of Hong Kong. Together with its partners, too, it added 1.17 million square metres to its landbank in China in the second half of last year.
Hong Kong developers can also afford it. The top 51 developers in the City have an average debt-to-equity ratio of 47%, compared to the average 126% in China, according to Bloomberg.
- CapitaLand likes China
From further afield comes CapitaLand, South East Asia’s largest property developer, which expects to invest more than S$6 billion ($4.97 billion) this year, mainly in Singapore and China. The Company (40% owned by Singapore State investor Temasek) is particularly optimistic about demand for housing in China, despite Government control measures. Singapore and China each accounted for some 36% of CapitaLand’s total assets as of the end of June; and, in H1, CapitaLand invested S$5 billion, principally in Singapore, China, Australia and Vietnam.
Although CapitaLand’s sales volumes in China declined in H1 compared with a year earlier, its average selling price increased by Yuan 1,000 ($155.4) per square metre. And, it expects to market some 2,500 more residential units in the second half of the year and has a pipeline of 22,000 units over the next four to five years.
- Affordable/Commercial
The low cost housing sector also remains robust and the Ministry of Land and Resources said that land supply for this sub-sector rose 24% in H1 to 16,477 hectares. The Government plans to construct 10 million affordable housing units this year and 36 million over five.
The Commercial Sector also remains popular and in Guangzhou a piece of land for office and retail construction sold at a floor space cost of Yuan 17,933 per square metre, a new record.
- Conclusion
My good friend Rational Man (RM) is thankfully standing on his own two feet on dry land; and he has deduced, from the above, that the residential property market in China is slowing down. This is more apparent than real, right now - which will change, of course; but it won’t crash (of course). The Commerical Sector also remains robust. And, a good friend of RM’s agrees. He is Li Ka-shing, Hong Kong’s richest man and Chairman of Cheung Kong (see above) and back in 2008 he predicted China’s stock market decline: “Every task that’s carried out in China these days has gone through careful consideration", he said. "I don’t think there’ll be a hard landing and I’m not concerned”.
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