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Chinese property market finds its fizz
In the sales office of a new property development in the affluent eastern Chinese city of Hangzhou, there is a buzz in the air. While the plate-glass towers that will form the Xizi International Centre are still three years from opening, prospective homeowners crowd around every available table.
“Someone just came in and bought five apartments,” says Ashley He, one of the battalion of salespeople working the floor.
The fresh enthusiasm for Chinese property, which has long been a yoke on the economy, is not confined to home buyers. Investors have also been snapping up equities and debt linked to Chinese real estate in recent weeks.
In October, new house prices rose in 35 out of the 70 Chinese cities tracked by the national bureau of statistics, up from 31 in September. Prices fell in 17 cities, and remained unchanged in 18 cities, including Shanghai.
It is a sharp turnround from the bleak predictions for a downturn or even a housing sector crash that have dominated the news until recently. Just two months ago, the World Bank warned that a “property market correction” was one of the biggest risks facing the Chinese economy.
The implications of the Chinese property market confounding expectations by strengthening rather than weakening would be huge for both China and the world.
“There’s this deep-seated belief that there are millions of empty, unsold apartments out there. That doesn’t appear to be right, and that’s surprising people,” says Stephen Green, an economist with Standard Chartered in Hong Kong.
There are still plenty of analysts and investors who believe the recent rally will fizzle out as scores of new property developments near completion and add supply to the market. But for now, China property bears are on the back foot.
Mr Green echoes other economists in calling Chinese property the “most important sector in the universe”. Not only has it been the main driver of Chinese growth over the past decade, it has also been the biggest factor in Chinese demand for global commodities from iron ore to copper.
A slowdown in housing construction, which accounts for about 10 per cent of gross domestic product, is one of the main reasons that the economy is on track for sub-8 per cent growth this year, its weakest performance in more than a decade.
China reported over the weekend that its official PMI [purchasing managers’ index], a gauge of manufacturing activity, rose to 50.6 in November from 50.2 in October. It was the latest in a series of positive data points, suggesting that growth is now rebounding after dipping for seven straight quarters.
Adding to the improved sentiment, Moody’s last week changed its outlook for China’s property sector to stable, having been negative since April 2011. The rating agency said it expected home sales to grow at a single-digit annual pace over the next 12 months.
“Solid underlying demand, continuing urbanisation, easing mortgage financing for first-time home buyers, and the increasing development of mass-market housing should drive sales and transaction volumes for property developers,” Moody’s said.
What Moody’s did not mention, however, is that one small but important part of the upturn is that developers have found ever more clever ways to get around government rules aimed at cooling the market.
The government, worried that property prices were unaffordable and that developers were building too many luxury homes, has implemented a series of tough policies since 2010.
Banks were ordered to cut their lending to developers and people were barred from buying second homes in most big cities in an effort to stamp out speculation.
Hangzhou, once one of China’s hottest housing markets, has been among the hardest hit. Its home prices have fallen 8.7 per cent from a year earlier, the second worst of 70 cities monitored by the statistics bureau. Greentown, the biggest developer in Hangzhou, has been forced to sell many properties to remain afloat.
But things are looking up at the Xizi International Centre, which is 30 per cent owned by Greentown. By building “hotel-style serviced apartments”, the dwellings have been classified as commercial property, not a residential property. As such, they are not subject to the official restrictions on housing purchases.
There are also other tricks. In Langfang, a commuter city that feeds Beijing, a sales agent at the 15-building Haodi Fang development said that homebuyers needed to have records proving they had paid taxes for one year before buying an apartment. “But there are agencies who can arrange that,” she hastened to add.
Regulators are aware of these loopholes but they want growth to stabilise and so do not appear to be in any rush to close them.
Having shunned Chinese property for the past few years, investors too are jumping back in. Shares in China’s two biggest property developers, Poly Real Estate and China Vanke, are up 40 per cent and 20 per cent respectively this year. Meanwhile, the main Chinese stock index has fallen 10 per cent.
The equity rally is fuelling a virtuous cycle, reducing the cost of issuing debt for developers and hence making fresh investment easier.
The debt market, which was closed to property companies for much of 2011 and early 2012, is now very much open for business. Last week, Soho China became the first Chinese developer to raise $1bn in one go, while a recent $500m issue by Longfor generated orders of $11bn.
The result has been a steep drop-off in the cost of borrowing for property companies. Agile, the first Chinese developer to raise money through the bond market this year, issued debt yielding 9.75 per cent back in April, which now trades at just 6.75 per cent.
The investors themselves have changed too, with sovereign wealth funds now joining asset managers, hedge funds and private banks in snapping up property bonds, according to one banker who worked on the Soho China issue.