The Great Housing Price Showdown Last January China s central government finally introduced measures strong enough to slow housing price increases. Speculators, developers, local governments and simple market demand, however, are pushing back By David Dal Molin THE ANNUAL SPRING REAL Estate Fair in March drew crowds of people as usual, but visitors looking for a home in the city may have been disappointed. Only a third of the projects on display were Shanghai developments, much less than in previous years. Moreover, most of the big developers were not exhibiting their properties, having chosen not to participate in the exhibition because the city s housing prices, after 19 months of sharp increases, were starting to soften. In January the government introduced the nation s first residential property taxes 0.4 to 0.6 per cent in Shanghai, depending on the value of the home and The new taxes were the latest in a string of measures aimed at bringing down house prices transactions subsequently plummeted. The new taxes were the latest in a string of measures aimed at bringing down house prices, which included increased down-payments, higher mortgage rates, and restrictions on who can buy a home and the number of homes a family can buy. But prices only started to soften when news of the upcoming property tax started circulating in December. As of late March, the property tax and 34 SHANGHAI BUSINESS REVIEW MAY 2011 www.sbr.net.cn
other recent measures seem to be effective in slowing down the rate of housing price increase. But for how long? Policy Effects In terms of housing transactions, the new measures decreased volume by 25 per cent in January and 83 per cent in February, according to Regina Yang, director of research and consultancy at Knight Frank. She notes that in January the average house price in Shanghai fell 4.9 per cent to Rmb22,990 (USD3,512) per sq. m., and a further ten per cent to Rmb20,630 (USD3,152) per sq. m. in February. Prices then started to pick up again in March, largely due to increased sales of luxury units. Average prices may not signify much, however, warns Shaun Brodie, associate director of research at DTZ. He says that any recent monthly variation in average price has mainly been governed by the quality of projects being launched for sale that month, rather than by recently introduced policy. Jeff You, an analyst with an overseas real estate fund investing in China that doesn t reveal its name to the media, says that prices of luxury homes may continue to rise under the new regulations, but adds, I don t think middle-end housing prices will be going up soon. As their cash flows dry up, the slowdown in transactions will definitely cause developers to delay their construction schedules, he says. However, developers at least large ones with plenty of cash are reluctant to lower prices to boost sales. According to the China Business Journal, China Vanke, Guangzhou R&F Properties, China Merchants Property Development, and Gemdale Corp. have all indicated they will not be lowering prices this year as a response to the new tightening policies. They are able to keep prices high, reports the journal, because high profits from recent years will sustain Large developers aside, Brodie suggests the new measures will continue to slow price growth through the rest of the year their operations if units aren t selling. Large developers aside, Brodie suggests the new measures will continue to slow price growth through the rest of the year. In any case, Yang believes that if the rate of price growth begins to rise sharply again then the government will probably introduce further tightening, making 2011 a year of policy. She predicts that luxury-home prices in Shanghai will drop slightly in 2011. The buildings are going up, and prices have also been rising albeit at a slower rate since March. Image source: Knight Frank. New Market Models Last March the central government announced a plan to attack housing prices on another front: the building of 36 million new units of affordable housing in the country over the next five 36 SHANGHAI BUSINESS REVIEW MAY 2011 www.sbr.net.cn
years, with about one million to be built in Shanghai. In an interview with Business Week, Pan Shiyi, chairman of Soho China Ltd., suggested the policy will significantly impact China s residential market because affordable units will account for half of market share. Jeff You also sees a strong impact on pricing, saying that the plan will affect mid-level market prices in Shanghai starting later this year. However, as Yang notes, of Shanghai s total housing supply in 2010, the proportion of units considered affordable already stood at 45.8 per cent, and the new plan will only raise that proportion to about 50 per cent. Given the small amount of change, the effect of the affordable housing scheme on mid-level housing prices in the city might be limited. In addition to the affordable housing plan, the central government has also required that local governments set target limits for real estate price growth, thus setting up the possibility of further, more Apartment owners are transferring the cost of the new property tax to their tenants targetted market interventions. As noted by You, however, many of the targets being set are hardly ambitious, with some as high as 15 per cent or 20 per cent. This reflects, he believes, a desire among local governments to keep land prices high so as to maximise their revenues from land sales. Investor View Yang believes that for most individuals the residential sector still remains attractive for investment, given the complexity of investing in commercial property and the consensus of an upward price trend over the long-term. Brodie agrees that Shanghai s residential sector is still a good long-term investment. A buyer looking for short-term gains, he says, will have to rely not just on capital appreciation but also on rental return. He will have to be more discerning when choosing his purchase and he will have to be prepared to study the market from a more micro project-by-project perspective. Developers considering new projects are generally thinking long-term, and their appetite to purchase land in Shanghai for residential development shows no significant decrease. According to Brodie s data, some Rmb16,157bn (USD2,468bn) was spent by developers in the city on land either for pure residential use or for mixed use but with a residential component during January and February alone. There are still (residential investment) opportunities in first-tier cities, mainly
SECTOR SURVEY RESIDENTIAL PROPERTY in the luxury market, says Jeff You of the real estate fund. However, he says that since the second half of 2010, his firm has shifted its attention to properties in second-tier cities, where restrictions on home buying are less tight. The new tightening measures may result in his fund having to wait longer to exit some investments, but not too much longer. His is a five-year fund, and he still expects most project investments to be sold in three to five years time. One notable trend, Yang points out, has been a dramatic increase in apartment rents in the Lujiazui district. This might be driven in part by the increasing number of financial industry firms moving into the area. Bensy Teo, general manager of serviced apartment complex Oakwood Residence Shanghai, which opened in April 2010, says his complex s rents have remained steady throughout 2010 and early 2011, but were raised by five per cent in March as he sees increased demand from Rental Outlook The new housing market restrictions are having a significant effect on rental prices in Shanghai. An increasing number of people are taking a wait-and-see attitude towards buying new housing and are tur ning their attention to the leasing market, causing the rental market to become increasingly brisk, says Yang. At the same time, apartment owners are transferring the cost of the new property tax to their tenants, she says. The luxury residential sector may present a good opportunity for investment in first tier cities. Lichaoshu Dreamstime.com
With the nation s residential market no longer looking as attractive as it has in recent years, Chinese investors are looking for other places to put their money domestic and Asia Pacific tenants. Teo suggested the recent earthquake tragedy in Japan might also affect rental prices in the city to some extent, but added it was too early to tell. Anecdotal evidence from other sources suggests there has been some Japanese apartment leasing activity in the city as a result of the quake. Speculators Look To New Lands Fitch Ratings recently reported a 60 per cent chance that China will face a systemic banking crisis by mid-2013 as a result of a burst property bubble. Such an event would likely have a heavy impact on the nation s economy. With the nation s residential market no longer looking as attractive as it has in recent years, Chinese investors are looking for other places to put their money, and the Spring Real Estate Show this year offered them a new channel for the first time the show included an area for foreign real estate. Agents from at least 13 different nations were offering a wide range of investment options, from luxury apartments in New York City to racing horse farms in Hokkaido, but it was a booth selling residences in Singapore, however, that seemed to be attracting the largest crowds. Kok Keong Tan of OrangeTee Pte Ltd., the company renting the booth, said that 20 to 30 per cent of the people who stopped by their booth had told him they came to the show expressly to see the Singaporean properties on offer. Statistics in his firm s brochure confirm that Chinese buyers of Singapore private residential properties have been increasing recently, and Tan believes the mainland s new restrictions on buying investment property in China is a reason. But wait might not China s armies of real estate speculators generate a property bubble in a tiny nation like Singapore? Prices are at record high level as in most key Asian cities, says Tan. But as it is, buyers who resell their properties face a hefty stamp duty and there are also limits on loans for purchasers with existing housing loans in Singapore, so speculators have been largely driven out of the market. Choose the most trusted way of living.