Chinese apartment sales dry up as Beijing restrictions take hold
THE plush marble showroom of New World Garden, a 3000-unit apartment complex between east Beijing's fifth and sixth roads, is silent.
THE plush marble showroom of New World Garden, a 3000-unit apartment complex between east Beijing's fifth and sixth roads, is silent. The stream of couples and families who would drift in to look at the elaborate model of the sprawling development that occupies the centre of the room, and talk to agents about pricing, has dried up.
A relentless string of restrictions put in place by Chinese authorities to cool the country's exuberant property markets over the past 12 months has taken hold. In last week's so-called Gold Week of National Day holidays -- a traditional home-buying time -- volumes fell by between 10 per cent and 89 per cent across 100 major cities.
And prices are softening. A report this week on the Chinese property sector from Macquarie Group was portentously titled "The Beginning of the End".
"We expect price declines to continue into Q411 and Q112," Macquarie says.
A New World sales executive admitted that sales had dropped off due to government measures.
"People still want to buy -- some can't due to government restrictions and some are holding off to see if prices start to fall," she told The Australian.
But despite the government-induced sales slump, demand in China for property and investment opportunities -- as well as residency and immigration options for its growing middle class -- spells good news for Australian property developers.
"It's like a tap -- the government had successfully turned it off and they have done a good job but the pressures will not stop building up behind it," says Peter Why, a director of Beijing-based consultancy GNS, which specialises in the Chinese and Australian property markets.
Billionaire Harry Triguboff's Meriton, for instance, is on record saying at least 60 per cent of its sales are to Chinese buyers. Melbourne-based developer Central Equity has predicated its whole business model on demand from China and other parts of Asia. Listed companies such as Mirvac, Lend Lease and Stockland would take a dent in their earnings without Chinese buyers.
"Much of the Chinese market is driven by immigration -- China passed the UK to become the biggest country of origin for Australian migrants last year. And many Chinese who have invested once are keen to do so again, as they see safe rates of return on their money," Why says. "What we are seeing is just the beginning. Just as Japanese investment in property followed their investment in resources, so it is with the Chinese. I would expect that we will see a surge of Chinese investment in the sector over the next five years. You are already seeing an increasing number of Australian developers taking their roadshows to China."
On the other hand, Australian companies with exposure to the Chinese property market will be feeling the pinch. The Chinese market is suffering from an oversupply of property developers who have made hay during the frenzy of recent years, when money was easy and government restrictions on the sector lax.
Most critically, funding has become a major issue for private small and medium businesses in China, with the government lifting the reserves that banks must keep on hand and increasing interest rates in an effort to tighten up on the vast amount of liquidity that has flooded in to the Chinese market on the back of the government's 2009-10 stimulus package worth 4 trillion yuan.
A report issued this week by Soufun.com, the largest real estate information provider in China, indicated that the average price of a house in 100 cities is 8877 yuan per square metre, a drop of 0.03 per cent from August and the first decrease since last September. Compared with September 2010, the price increased by 6.15 per cent.
The average price in 10 major cities, including Beijing, Shanghai, Guangzhou, Chengdu and Tianjin was 15786 yuan, the same as in August, so prices have flattened.
"The market in the first three quarters in Beijing is lagging," the Soufun report says.
"Sales dropped 19.49 per cent from the same period of last year, in Chongqing they dropped 34.19 per cent, in Haikou (in Hainan province) sales fell 49.22 per cent. Among 20 major cities, 13 saw sales decrease on 2010."
CSLA property analyst Nicole Wong highlighted three warning signs: property group Cheung Kong has said it is now approached on a daily basis by developers looking to sell their companies because they can't get funding; some developers are now offering 5 per cent price reductions or staggered payments to stimulate waning demand; and smaller companies are still developing aggressively and will have net cash outflows for the year even if they sell existing projects, raising industry-wide risk.
He Tian, chief analyst at China Index Academy, another property research company, told The Australian: "According to the national statistics bureau, sales volumes of houses increased 13.6 per cent over the same period last year, from January to August, and there was a 25.9 per cent increase in terms of size of houses sold compared to last year, all over China. That is to say, 598 million square metres of houses were sold, and sales volume reached 3.1 trillion yuan ($488 billion).
"In this sense, the real estate market is still developing, based on the historical record of sales volume and houses sold in 2010.
"Five years ago, house prices were 10 times people's income, and now it has grown to 20 times, which shows affordability is decreasing."
Another key issue in Beijing is that land sales are closely tied to the financial health of local governments. These are widely in debt after being handed billions of yuan in bank loans.
The official estimate of local government debt from central authorities is 10,717 trillion yuan, but no one really knows.
It is this nexus that concerns economists examining the broader economic outlook for China and which some believe may trigger any coming hit to the country's financial system.