August 30,2009

Chinese Real Estate Enters a Twilight Zone

By Niu Zhijing, Shanghai

China's real estate market is entering a biding time after this year's surge. A large number of developers are still purchasing land and arranging finance, preparing for a new round of increases, but prices could also fall depending on the government's credit policy.


In the first half of this year, the significantly rising prices and increasing volume in major cities' commercial housing prices was due mainly to relaxed credit policies and tax relief. But in July, banking supervisors began requiring banks to strictly scrutinize their new mortgage lending to prevent bad loans. Large state-owned commercial banks, whose lending had taken off in the first half, have tightened loan approval for the second-house purchases, and volume in real estate transactions has fallen in major cities since mid-July.

Since then, Shanghai's rising prices have slowed, and second-hand housing transaction prices haven't moved from June's, though there has been no downward trend.

Meanwhile, China's largest listed real estate companies have begun re-financing. Poly Real Estate, Beijing Capital Development, Golden Group, and Vanke have issued shares. The largest developer Vanke intends to refinance to the tune of 11.2 billion yuan.


Refinancing reflects the crazy land purchasing at present. Affected by strong first half sales, land auction prices have continued to increase. 553 land transactions took place in 60 major cities in May, up 73%, selling 26.86 million square meters, up 89%, year-on-year. More than a third of the land traded at above-floor prices, with an average premium of 56%.

In this land purchasing boom, state-owned enterprises (SOEs) get in before private enterprises, buying up land at very high prices, and there are questions whether SOEs possess sufficient risk control.


The government has shown no signs of significantly tightening lending. As they showcase signs of economic recovery, many leaders urge a continuation of the loose monetary policy, hoping to ensure that the real estate market in the next period does not run out of cash. But a turning point is coming. Some preferential policies for real estate will expire at the end of this year. And with economic recovery, the government will be forced to readjust lending policies.


Changjiang Securities analysts point out that for real estate developers, the earlier tight capital chain has become loose. Interest rates have fallen to those of 1996, and the proportion of capital needed for housing purchase is down to 20%, which, combined with deferred land transfer fee payments, boosts a new round of real estate investment and development boom.

Galaxy Securities says that changed developer expectations will promote a hot land market in the second half. As total land supply is subject to urban planning as well as restrictions on developing agricultural land, new supply pressure is growing. In the next three years, more land for affordable housing will be needed, but the total supply will decrease, leading to a developer feeding frenzy.


Other voices point out that any prosperity in this pattern will be short-lived. Shi Yongqing, chairman of Central China Real Estate, says the current thrusting and striving in the real estate market is a departure from the real economy status quo. In Hong Kong, unemployment is increasing and middle-class incomes are falling, and the ability to bear rising, already-high housing prices is diminishing. The biggest problem in the property market is the lack of new purchasing power these rising prices should reflect.

Noticeable also is that foreign institutions are withdrawing from the Chinese real estate market. Lehman Brothers disposed at a discount of nine real estate-related loans and seven bonds, of which six were involved in Shanghai's commercial real estate, in exchange for about $200 million. Australian investor Macquarie sold its Shanghai City Hotel apartments at a loss of 40%. South Korea's POSCO also sold its commercial buildings in Lujiazui, Pudong, at a 40% discount.

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