Talk­ing Busi­ness

Curb­ing fi­nan­cial risk helps tame prop­erty mar­ket

China Daily (Hong Kong) - - BUSINESS - By SABRINA WEI

Tight poli­cies will con­tinue in the real es­tate sec­tor un­til next year as the gov­ern­ment guards against fi­nan­cial risk. In­vest­ment growth in res­i­den­tial prop­erty de­vel­op­ment looks cer­tain to slow again in the sec­ond half of this year.

With tight liq­uid­ity and slug­gish sales, de­vel­op­ers could face fi­nanc­ing dif­fi­cul­ties, high costs and in­suf­fi­cient pay­ment col­lec­tion.

As a re­sult, there might be an­other round of merg­ers and ac­qui­si­tions in the com­ing year, forc­ing some small and medium-

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sized de­vel­op­ers to with­draw from fierce com­pe­ti­tion.

In­flu­enced by reg­u­la­tory poli­cies, hous­ing prices are likely to go down in first- and ma­jor sec­ondtier cities. But there should be prop­erty in­vest­ment op­por­tu­ni­ties in third- and four-tier cities.

Still, un­til real econ­omy weak­nesses have been fun­da­men­tally changed, the real es­tate sec­tor will hold its po­si­tion as an im­por­tant in­vest­ment source in the short term.

Af­ter China’s econ­omy en­tered the new nor­mal, the gov­ern­ment fo­cused on cut­ting over­ca­pac­ity, re­duc­ing ex­cess in­ven­tory, delever­ag­ing, re­duc­ing cor­po­rate costs and shoring up weak spots.

Last year, there was a con­cen­trated ef­fort to cut over­ca­pac­ity and re­duce ex­ces­sive in­ven­tory. In real es­tate, the mar­ket continued to grow sig­nif­i­cantly from 2015, stim­u­lated by these poli­cies.

The an­nual sales area of com­mer­cial hous­ing grew 22.5 per­cent year-on-year, with sales vol­ume jump­ing 34.8 per­cent.

Even so, this prop­erty boom was led by sec­ond-tier cities. Mar­ket trans­ac­tions in He­fei, Nan­jing, Xi­a­men, Suzhou and Wuhan saw a sud­den surge in prices.

Be­fore new reg­u­la­tory poli­cies were is­sued on Sept 30, 2016, yearon-year house price in­creases in these cities ap­peared to be more than 60 per­cent. Land auc­tion prices also hit record highs.

Against the back­drop of a slug­gish real econ­omy and a weak­ness in the stock mar­ket, real es­tate had be­came to many a cru­cial in­vest­ment sec­tor, de­spite high lever­age.

Naturally, an over­heated mar­ket tended to drive peo­ple crazy.

Ev­ery­body in the prop­erty sec­tor was con­vinced that prices would con­tinue to rise. A clas­sic bub­ble sce­nario.

Data col­lected by the Peo­ple’s Bank of China, or the coun­try’s cen­tral bank, showed an­nual new loans last year hit 12.65 tril­lion yuan ($1.9 tril­lion). Mid­dle- and long-term loans grew 5.68 tril­lion yuan year-on-year.

But new loans by en­ter­prises were re­duced by 1.28 tril­lion yuan dur­ing the same pe­riod.

While this was go­ing on, the gov­ern­ment started to de­flate the prop­erty bub­ble and by Sept 30 a new reg­u­la­tory pol­icy was in­tro­duced.

In the fol­low­ing six months, var­i­ous poli­cies were rolled out in a bid to limit prop­erty pur­chases, loans and sales to com­bat spec­u­la­tion.

In var­i­ous cities, new guide­lines were used in land auc­tion pro­ce­dures to curb hous­ing and land prices in an ef­fort to sta­bi­lize the real es­tate mar­ket.

These de­ci­sions and other poli­cies have ef­fec­tively re­strained mar­ket turnover.

Since March, res­i­den­tial hous­ing trans­ac­tions in first-tier cities and ma­jor sec­ond-tier cities have dropped sharply. Prices have be­gun to fall.

In Bei­jing, the price of sec­ond­hand hous­ing, which ac­counted for 75 per­cent of the city’s sales, showed neg­a­tive growth. But, again, mar­kets in third- and fourth-tier cities main­tained an up­ward trend.

The au­thor is head of North China Re­search, Cush­man & Wake­field

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