Real estate enigma

Don’t look now: are prices falling?

If the stockmarket is anything to go by, China’s property prices are heading south. Last week, real estate stocks took a tumble, with several Hong Kong-listed Chinese developers suffering double-digit declines.

The trigger for the drop was a report that the China Banking Regulatory Commission had ordered trust companies to assess their exposure from lending to Greentown, the largest property developer in Zhejiang province. Greentown’s stock price dropped more than 16% last Thursday following reports of the notice, which led to a broader decline in Hong Kong among mainland Chinese property companies.

Greentown’s chief financial officer Simon Fung told the Wall Street Journal that the company’s loans from trust companies comply with banking regulations. “It’s not really our position to clarify this as it is normal for the banking regulator to conduct trust loan checks from time to time,” says Fung.

Greentown total debt hit Rmb34.6 billion ($5.4 billion) by the end of June – almost 40% of it maturing in 12 months – and Rmb5 billion of its liabilities related to trusts. Greentown’s net gearing ratio reached 163% at the end of June too, rendering it the most highly-geared of the Chinese property developers listed in Hong Kong. The debt was taken on to fund the firm’s aggressive expansion when the property market was booming, says company chief executive Shou Bainian.

With the housing market now slowing down, analysts now question the viability of some of the more indebted developers.

“Industry consolidation is likely to accelerate, weeding out the weaker players. The hard times aren’t over yet,” concludes S&P’s credit analyst Frank Lu.

Although stock market sentiment towards China’s property developers has plummeted, as yet there does not seem to be a comparable drop in the prices of many of the flats that they sell. While price appreciation has slowed there are no outright declines. Last month, new-home prices rose in all 70 cities monitored, says Bloomberg.

But there are reports that prices in some cities are under pressure.

In Shanghai, transaction volumes have slumped more than 50% from a year ago, says China Index Academy. As a result, developers have cut prices by up to 10% on nearly 150 residential projects in the city, says Soufun, the country’s top property website. Similarly, even though home prices in Beijing have held up – rising 1.9% in August from a year ago – the rate of appreciation has slowed to a crawl, compared to the boom times.

Still, industry insiders say that just because housing prices in first-tier cities are coming down doesn’t mean that the rest of the country will follow. The view is that underlying demand for housing in China’s third and fourth-tier cities is still robust. Nanchang, a city about 800 kilometres southwest of Shanghai, saw the biggest increase in August, climbing 9.1% from a year ago.

“China is not just Beijing, Shanghai and a handful of major international cities. As a result, it is a mistake to look at the property markets in those major population centres and draw general conclusions about the country as a whole,” Jack Perkowski, managing partner of JFP Holdings, wrote in Forbes.

Investors appear to be taking heed. According to CBRE Research China, overseas developers have begun targeting China’s smaller cities.

For example, Mitsubishi announced just last week it will develop a large-scale residential complex in Shenyang – the Japanese firm’s first condominium development in China. “It is not surprising for foreign institutional investors to tap China’s lower-tier cities, because the demand there remains strong as a result of a lower urbanisation rate, and the local governments are more willing to cooperate with them,” says Carlby Xie, head of research and consulting for North China at Colliers International.

Can any general conclusions be drawn? With so much contradictory data, so much regional diversity and so little agreement on some of the key questions in the market (how many apartments currently stand empty, for instance) China’s property future is devilishly difficult to predict.

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