Betting the farm

Chinese cities seek to solve property glut via subsidised sales to villagers

Man collects radishes outside his home near construction site of a residential complex on the outskirt of Taiyuan

In his sights: a new home

When the State Council rolled out a policy stopping state firms from providing homes for their employees in 1998, analysts predicted a boom in sales of residential housing. At that time most of China’s real estate developers were cash-strapped and inexperienced, giving their Hong Kong-based rivals an advantage. For instance, when New World China Land (NWCL), the mainland Chinese unit of Hong Kong property firm New World Development, went public in 1999, it had the largest land bank in China.

By the end of last year NWCL had left much of that land bank undeveloped, and it still stood at 25 million square metres, only slightly bigger than in 1999. (In comparison, the land reserve of Wanda Commercial stands at 73 million square metres.) Perhaps that’s why trading in NWCL’s stock has been thin, with the company’s shares frequently priced below their net asset value. Most of the buying interest seems to have come from its own controlling shareholder, New World Development, which tried and failed to take NWCL private in 2014. Last week the conglomerate came back with a sweetened bid, offering to buy the 30% stake in NWCL it doesn’t already own for $2.8 billion.

Henderson Land, another Hong Kong property blue chip, has been through a similar experience. Its mainland unit Henderson China went public in Hong Kong in 1996, but was taken private again in 2005 after its business stagnated.

So why have some of Hong Kong’s most astute property tycoons not done better in mainland China?

“It takes more than cash to crack the Chinese property market. Hong Kong developers generally don’t have good enough relationships with the local governments to be successful in the country,” Hong Kong Economic Journal explains. “The inability to adapt to the constantly changing housing policies in China puts Hong Kong firms in a disadvantageous position.”

Responsiveness to regulatory changes is especially important as the Chinese government has long viewed the real estate market as a key tool for directing the economy.

As recently as October 2013, President Xi Jinping was demanding that officials should “exert every effort” to increase residential supply to make apartments more affordable.

Two years later, the diktat has reversed, with Xi urging instead a destocking of the property market (i.e. before building any more, developers should unload more of their unsold housing units, see WiC304).

According to the Securities Daily, the gross floor area of completed but unsold residential units in 50 major cities totalled 373 million square metres as of November. “It will take 12.5 months to remove this pent-up inventory,” the newspaper suggests, assuming that demand remains robust.

Many residents of major cities already own their homes. So where will the fresh demand come from? One option is to give migrant workers more support to buy into urban real estate.

In Puyang, a city in Henan province, residential sales dropped from Rmb4.5 billion ($683.3 million) in 2013 to just Rmb300 million during the first half of last year. Puyang’s officials then decided to offer subsidies – up to Rmb150 per square metre – to “group purchase buyers”. This helped a new breed of customer – typically groups of families from nearby villages – to become homeowners. The Puyang government says it provided Rmb120 million worth of subsidies to rural families, and generated Rmb4 billion in property sales in the second half of the year.

The policy paid for itself: the government also pocketed Rmb500 million in taxes from real estate developers.

Southern Weekend says Puyang’s initiative has been copied in other cities, and that for many local governments the subsidies are essential for their fiscal health.

“Taxes from the property market are too important, accounting for more than 50% of revenues in most Chinese cities and counties,” the newspaper estimates.

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