No place like homes

More policy loosening on the cards for the property sector?

A general view of the southern Chinese city of Shenzhen

Ahead of the rest: property prices have risen strongly in the southern city of Shenzhen

Singles’ Day started in the 1990s as a reaction to Valentine’s Day, when Chinese students started poking fun at their “bare stick” (i.e. singleton) status. But its commercial scale has outgrown even America’s Black Friday. Last week it comfortably reinforced its status as the world’s biggest shopping festival with record online sales of Rmb91 billion ($14 billion) on the day itself: November 11.

Just before the buying bonanza began, homebuyers in Shenzhen took things one step further. About 11,000 people were invited to a sports stadium where they snapped up 1,637 units at a new residential complex. Over deafening rock music China Horay is believed to have generated at least Rmb6 billion in sales inside six hours.

Chinese real estate developers have developed increasingly innovative sales tactics (sometimes an apartment comes with a girlfriend, see WiC133). But the scale of the event in Shenzhen was groundbreaking, Caijing magazine suggests. “This stadium-sized auction has resulted in the largest volume of sales and the biggest crowd of potential buyers for any residential project in the past 10 years,” it reports.

“More than 10,000 buyers have flocked to empty the shelves of a developer in a single day… This new page in the history of Shenzhen’s property market has shocked everyone,” Guangzhou Daily agrees.

The vitality of the Shenzhen property market won’t be a surprise to regular WiC readers. A few months ago we reported that property owners in the southern city were tearing up agreements to sell their homes because they were newly confident that home prices would rise once again (see WiC290).

That optimism felt couner-intuitive as recently as February, when the local real estate scene sent out a bleaker signal with Shenzhen-based Kaisa Group becoming the first property firm to default on an offshore bond (see WiC265). The better news this week, according to 21CN Business Herald, is that Kaisa is close to finalising a deal with creditors to restructure its $11 billion debt.

But demand and supply dynamics in Shenzhen, a first-tier city, are unlike those in smaller cities. Thanks to demand from a large migrant population, new home prices are up more than 30% year-on-year as of August, according to official data. That compares with a 5.6% price increase in Shanghai.

Prices in Shenzhen may be increasing, but that’s not the case in all of China’s cities. “Most of the rest of the world’s number two economy is dealing with a slumping property market that is weighing on the country’s growth,” the Wall Street Journal notes. “But China’s most economically developed cities have the opposite problem – they have fewer homes available for sale and surging demand from home buyers.”

The real estate market remains a favoured mechanism for the central government to regulate the wider economic mood. Since the beginning of 2015 the policy headwinds have switched from a tightening bias. On top of a number of interest rate cuts, homebuying restrictions in major cities have been loosened. In March the finance ministry exempted sellers from a transaction tax if they had owned the property for two years, and in late September the central bank cut the minimum downpayment for first time homebuyers in some cities to 25% from 30%.

Another strong policy signal has just been sent from on high. The Party’s Leading Group for Financial and Economic Affairs, which is chaired by Chinese President Xi Jinping and attended by three other members of the Standing Committee of the ruling Politburo, met earlier this month and made plain the health of the property market was high on its agenda. “Destocking the property market and promoting sustained development of the sector”, the state broadcaster CCTV quoted Xi as saying, was one of the “key tasks of the government” in the coming year.

After Xi’s comments, “destocking” – i.e. helping developers to offload their unsold inventories – quickly became a buzzword on social media. “We have to go back to October 2013 for the last time Xi Jinping had commented directly on the real estate market,” 21CN notes. “At the time Xi was giving out a directive that China should ‘exert every effort’ to increase residential supply especially the provision of affordable housing for lower income families.”

Xinhua news agency also reckons that Xi’s remarks are a signal that more stimulus will be directed at the sector. A cabinet meeting presided over by Premier Li Keqiang this month also discussed household registration reforms to encourage rural residents to buy new homes in cities.

The latest loosening of the country’s One-Child Policy is also being seen as a longer term fillip for demand. (For example, in affluent families it isn’t unusual for grandparents to buy an apartment for each of their grandchildren.)

“Real estate accounts for a crucial proportion of investment and consumption in China, so home purchases will continue to be encouraged as the macro economy is under pressure,” Centaline Property’s chief analyst Zhang Dawei told Xinhua.

But destocking is easier said than done. For years analysts have been pointing to clusters of seemingly vacant residential buildings, and even empty ‘ghost towns’, as evidence of oversupply and an inevitable implosion in prices.

According to the latest estimates by Citic Securities, Chinese developers’ unsold inventory (including projects under construction) amounts to 13.3 billion square metres in floor area (as of this month). Even if these residential apartments get ‘destocked’ at a pace of 1.3 billion square metres a year – the peak achieved in 2013 – it would take 10 years to digest the new supply.

Nonetheless China Securities Journal believes destocking could accelerate next year. The newspaper expects more supportive measures to be unveiled, like tax breaks that make homes more affordable, while the Economic Observer has been speculating that some local government might provide subsidies for homebuyers.

Unsurprisingly, the share prices of some of the property developers have reacted well to the suggestions of a shift in the policy environment. Guangzhou Evergrande, for example, has seen its stock price increase by more than 100% so far this year.

There’s good reason for policymaker’s renewed interest in the health of the real estate sector: its overriding importance to the broader Chinese economy. The property market accounts for almost 15% of Chinese GDP. And if other supplementary sectors are included, the weighting increases, going close to 25%.

“In the next five to 10 years there is no other industry to displace real estate as the country’s growth engine,” Wang Jianlin, the chairman of property conglomerate Wanda Group told Beijing News in an interview this week. “Real estate remains the life-saving straw for the Chinese economy.”

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