Real estate special (August No. 2): Super-tanker

It is hard to believe that the Chinese property market is slowing down after reading the statistics for July. Investment was up 34% at Yuan 3.2 trillion in the first seven months of the year with sales running 26% to the good, over the same period. Furthermore, when looking at the first half comprarative percentages, these were both lower at 33% and 24% respectively. For the bears, they might scratch at floor space under construction which was up ‘only’ 31% in the first seven months (at 4.2 billion square metres) after +32% in H1. Same goes for the Real Estate Climate Index which dipped from 101.75 in June to 101.50 in July (in October last year it was 103.57).

On a brighter note was funding from ‘own funds’ rising 34%, while mortgages dipped 5%. Talk about cash under the mattress? I also think China Vanke’s fall-out in the month of July, with contracted sales (as opposed to net) off 32%, was an individual aberration.

In Hong Kong, though, there is no such ambiguity and, as the economy dipped in Q2 (with GDP off 0.5% quarter on quarter), so the housing market is under the cosh. Asking prices are down 10%, with more to come, and a key land auction this month came in a reported 30% below expectations.

Of course, the PRC real estate market will slow down, because the Government is intent on it; especially price appreciation. And there are clues, with both Beijing and Shanghai sitting on unsold housing stock equivalent to 10 times monthly sales; and 353 parcels of land at auction failing to sell in the January to July period – which is an increase of 242%. Nonetheless, there is also a 36 million, five year affordable housebuilding programme (albeit that 2012’s annual target has been trimmed from 10 to 8 million).

The domestic real estate market in China is a super-tanker and your average one takes 14 minutes to stop - even when it wants to. A super-tanker also needs two kilometres of ocean to turn around in.

- Robust RE market in first seven months

Metric January-July % change (first 6 months)
Investment Yuan 3.19 trillion +33.6% (32.9%)

Sales (value) Yuan 2.89 trillion +26.1% (24.1%)
Sales (volume) 520.4 million m2 +13.6% (12.9%)

Funds raised Yuan 4.79 trillion +23.1% (21.6%)
Own funds Yuan 1.93 trillion +34.0% (32.7%)
Mortgages Yuan 486.9 million - 5.1% (- 7.9%)

Floor space UC* 4.2 billion m2 +30.8% (31.6%)
Floor space New 1.2 billion m2 +24.9% (23.6%)

RE Climate Index 101.50 (July) 101.75 (June); & 103.57 (Oct)
*UC = under construction
Source: NBS

China’s annualised growth in real estate investment and sales sped up in July even as the Government raised additional controls on the sector. Property investment in China grew by 33.6% in the first seven months of this year to Yuan 3.2 trillion, up from 32.9% in H1. Meantime, actual property sales increased by 26% to Yuan 2.9 trillion over the same period (H1 24%); and as measured by volume, sales rose 13.6% in the January-July period from a year ago to more than 520 million square metres (which is more than 5 billion square feet) with H1 at +12.9%.

Clearly, China's push to build more affordable housing together with and robust buyer reservations last year have galvanised the gains. That said, both China Vanke and Poly RE, have started to reduce prices slightly as the policy outlook turns against them; and more will inevitably follow suit. Indeed, it is reported that large cities such as Beijing and Shanghai have unsold residential property equivalent to more than 10 times their current monthly sales. Chinese banks are also cutting their exposure to the real estate sector, although the banking regulator has repeatedly said it is confident the sector can withstand home prices falling as much as 50%.

All that said, widespread price cuts have not been seen, and home prices in most cities are still rising, albeit at a slower pace.

- China’s regulators tell banks to tighten property lending
It is reported that the Government has told banks to tighten lending for real estate as it anticipates possible credit issues as its constraints on the market make a greater impact. This follows China Banking Regulatory Commission’s edict last month not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential.

The CBRC has also said that lenders should be vigilant about funds “illegally flowing” into the property market. Similarly, the banks have also been told to be particularly alert to risks in commercial properties, where the regulator said speculative funds are increasingly flowing because of controls in the residential market. There was also been a 70%+ rise in developers raising debt from overseas in the first half.

- China reduces target number of affordable homes in 2012 by 20% to 8 million units
The Chinese government has cut its affordable housing development target by 20% for 2012 to 8 million units, it is reported. But this is fine tuning and the construction of State-subsidised homes is crucial for the success of China's ongoing campaign to control property inflation.

- China tells banks to fund building of low cost housing
Chinese banks should lend to healthy local governments which are building State-subsidised homes, according to the China Banking Regulatory Commission. Indeed, the banking regulator has made it clear that it does not want its credit restrictions to starve all local governments of funding. “Banks can lend to local government financing vehicles which have sufficient capital, are well managed, and whose business revenue can cover interest repayments” said the CBRC. Reuters has also reported that loans issued for the construction of affordable housing should not be priced below 0.9% of the PBOC’s benchmark lending rate and should have maturities no longer than 15 years.

- China Vanke’s H1 profit rises 5.9% on sales in smaller cities
The Nation’s largest developer by market value said H1 net profit climbed 5.9% to Yuan 2.98 billion ($460 million) to the end of June as it sold more homes in smaller cities which were less impacted by Government controls. Net revenue, meantime, increased 19% to Yuan 20 billion, which meant that net profitability dipped from 16.8% to 14.9%.

Government’s policy has had an impact on the property industry, but larger quoted companies such as Vanke are holding up well because the measures are aimed at speculative purchases said Daiwa Securities Capital Markets.

Vanke, which expanded into smaller cities such as Qinhuangdao and Taiyuan, completed the sale of 1.1 million square metres (11.8 million square feet) of homes in the six months, accounting for 15% of its target for the year. “With more fittings in the homes we sell, our construction cycle has become longer and we are even lagging behind. But with more homes to be completed in the fourth quarter, we expect the year’s settlement value to be much higher”.

“Vanke achieved great sales amid the Government’s curbs, but the key is delivery” added Daiwa. “They are going to face a big challenge in second half in delivering those homes to customers who paid in advance”.

The developer focused on small and medium sized homes in the first half as it aimed to sell them quickly; and some nine-tenths of its apartments are smaller than 144 square metres.

“Vanke’s sales are better than its peers because most of its products target the mass customer rather than high end properties which the Government is cracking down on” said Credit Suisse. “Their move to smaller cities also helped because the measures in those markets weren’t as strict as those in big cities”.

Vanke, the first among China’s biggest developers to report first half earnings, had Yuan 40.8 billion of cash by the end of June, up 10% from Q1. It is “cautious” about buying more sites, although it will still “seize good opportunities” for land that may emerge this year, continued Credit Suisse.

- Vanke sees July's contracted property sales tumble 32% to Yuan 9.08 billion, month on month; although they are still ahead 64% in the first seven months of 2011
China Vanke reported contracted - but not completed - property sales of Yuan 9.08 billion in July, which is a fall of some 32% month on month (this is not be confused with net revenue - as above). However, contracted property sales in the first seven months of 2011 were Yuan 74.1 billion, up 64% year-on-year; and by volume it agreed to sell 6.37 million square metres of apartments during the same period, which is an increase of 61%.

The developer attributed its July sales drop to a reduced number of properties available for sale in that month, adding that it would accelerate new offerings in the coming months to boost sales.

China Vanke has been faring well under the Government’s strict property polices over the past months, but it is starting to feel the pinch too. “We expect current property measures to continue and play a bigger role in reining in the housing market in the rest of the year. And as developers’ sales are being hampered, competition will be hotting up as we all are trying to reduce as much inventory as possible” it said. The Company also added that it would continue to adopt a prudent approach, which it believes has helped it cope with tough times in the past and underpinned it leading market position.

China Vanke has been cautious in land buying in the first half on concerns of market uncertainties; but expects better opportunities to reserve more land in H2. The developer also initiated a promotion in July to counter pressure from other developers volunteering to cut prices. It offers a slight discount of Yuan 5,000 per unit, which is probably more apparent than real.

- China Overseas Land & Investment see H1 net profit rise 35% to $871 million
China Overseas Land & Investment, a Hong Kong-based builder controlled by the Chinese Construction Ministry, said H1 net profit climbed 35% (including exceptional gains) to HK$6.8 billion ($871 million). Meantime, sales rose 25% to HK$21.9 billion which means a net profit margin of 31.1% (vs 29.0%).

The developer’s profit rose even as China expanded efforts to prick any incipient real estate price bubbles. The Government said last month it will rein in residential prices in smaller cities after limiting home purchases in metropolitan areas including Beijing and Shanghai. “China Overseas diversified portfolio in both the Country’s major and smaller cities helped boost their sales performance and the earnings” added Yuanta Securities. “Looking forward, the developer has sufficient resources to generate profits from projects”.

The Company is “confident” about the medium and long term development of China’s property market, referencing industrialisation and urbanisation.

China Overseas, which builds homes and offices in China, Hong Kong and Macau, said operating profit rose 37% to HK$10.9 billion. Operating profit from mainland China increased 29% from a year earlier, accounting for 79% of the overall result.

The Company’s contracted sales advanced 82.4% in the first seven months from a year earlier to HK$60.3 billion.

“The Company has already achieved more than half of the year’s sales target” said CLSA Asia-Pacific Markets. “China Overseas already operated in those home purchase restriction zones in the first half, so their earnings in the next half will not be much different”. The developer acquired 16 plots in China in the first half and plans to expand its land bank at low cost in the future.

China Overseas cut prices for four projects around the country this year by 10 to 15% from a year earlier, the Company said last month. The price reduction helped boost its market share, added CLSA. For its part, China Overseas said it will not be “over-optimistic” and will follow closely the changes in China’s economy and policies.

- China largest housing contractor sees H1 sales rise 79%
China State Construction Engineering Corporation, the Nation’s largest housing contractor has said that sales in the first seven months of the year rose 79% from a year earlier to Yuan 56.6 billion ($8.8 billion) as it won construction contracts worth a combined Yuan 482.1 billion, which was 51% more than a year earlier.

- Poly Real Estate sees 38% rise in contracted sales in July
China’s second largest developer by market value, said contracted sales in July rose 38% from a year earlier to Yuan 5.1 billion.

- R&F Properties remains confident
Guangzhou-based R&F Properties, whose property projects are principally in first and second tier cities, said sales rebounded in July to Yuan 3.03 billion after a less robust performance in May and June. This meant, too, that in the first seven months, sales rose to Yuan 16.45 billion, which is 41% of its full-year target of Yuan 40 billion. And, this goal remains remains unchanged; however R&F is looking to diversify to lower tier cities including Harbin.

- Hong Kong apartment sellers cut asking prices
Hong Kong house prices - which surged 70% since the end of 2008 - are set for their biggest decline since Lehman Brothers collapsed in September of that year. Slower global and economic growth is cited (Q2’s GDP fell 0.5% versus Q1) as well as Government policy of increasing land supply increases.

Already, according to Midland and Centaline, the City’s two largest real estate agents, house prices are being reduced by as much as 10%; and the former already reported that June and July saw the first consecutive falls in price since December 2008. Similarly, UOB Kay Hian says “we should see at least a 5% further correction in the second half if the crisis in the US and Europe deepens”. Home transactions also fell to a 30 month low in July.

Part of the growth in the Hong Kong residential market has been attributed to buyers from other parts of China, which Centaline estimates accounted for about a third of new luxury property purchases in Hong Kong in the first half. This may slow down now as the PRC economy slows and the Government takes policy action on controlling the domestic real estate market. “China periodically undergoes cooling and that is likely to have some knock-on effect on their demand in Hong Kong’s residential market” said Savills. “We don’t expect it to be long lasting and we think previous growth would resume after six to eight months”.

- Key Hong Kong land auction misses expected price
Hong Kong sold a residential site at a lower-than-expected HK$5.5 billion ($704.7 million) at auction ast week. It is reported that the sole bidder was a consortium which includes Kerry Properties (40%), Sino Land (40%) and Manhattan Group (20%). And the site located in Shatin in the New Territories is for for luxury apartments and comprises 23,000 square metres (247,600 square feet) from a gross floor area of 96,000 square metres.

“The (weak) result was a bit of surprise” said Credit Suisse. “It suggests the Government is willing to sell land at a lower price and that land prices may trend down in future”. It also suggest something of a buyers' strike too. Note, too, that a sample of expectations from seven consultants and securities firms pointed to an average price forecast of HK$8.08 billion.