Study shows devel­op­ers’ soft­en­ing out­look

The lat­est cy­cle ap­pears to have reached a high in the first half of this year; the lower July sur­vey read­ing may in­di­cate a po­ten­tial cool­ing down of the prop­erty mar­ket ahead.

China Daily (USA) - - VIEWS -

China’s prop­erty mar­ket was a roller-coaster ride in the first half of this year. Hous­ing sales spiked in the first quar­ter be­fore cool­ing down in the sec­ond. The surg­ing hous­ing prices in some sec­ond-tier ci­ties have re­sulted in a newround of lo­cal tight­en­ing mea­sures.

To as­sess the de­vel­op­ments in the first half and gauge devel­op­ers’ ex­pec­ta­tions from the sec­ond half, we (Stan­dard Char­tered China) con­ducted a semi-an­nual pro­pri­etary sur­vey of China’s prop­erty mar­ket in July with the fo­cus on un­listed devel­op­ers in lower-tier ci­ties.

The sur­vey shows devel­op­ers’ con­struc­tion ac­tiv­ity ac­cel­er­ated in the first half, and the mo­men­tum is ex­pected to be sus­tained in the sec­ond. Con­struc­tion of new­pro­jects im­proved in the first half, and the com­ple­tion rate of the to­tal floor space of newly started con­struc­tion in­creased to 36 per­cent— from 18 per­cent growth in the first half of 2015 and 23 per­cent in first half in 2014. This mo­men­tum is ex­pected to con­tinue dur­ing the rest of this year, as the com­ple­tion of pro­jects un­der con­struc­tion will boost sales rev­enue for devel­op­ers.

The land mar­ket ap­pears luke­warm de­spite high land prices, although ris­ing land prices re­main a con­cern. Most of the devel­op­ers ex­pect a con­tin­ued mild rise in land prices— within 10 per­cent— in the sec­ond half of this year.

Un­like the spike in top-tier ci­ties, hous­ing sales seem stable in our sur­veyed lower-tier ci­ties, and most of the devel­op­ers re­main cau­tiously op­ti­mistic about the sales out­look for the rest of the year.

Price dis­counts were less preva­lent in the first half of the year; in­stead, av­er­age sell­ing prices showed an up­ward trend, with a rise of 10-20 per­cent. But to pro­mote sales, ad­di­tional of­fer­ings were still in place.

The sur­vey showed the per­cent­age of first-time buy­ers dropped to 43 per­cent from 50 per­cent in the Jan­uary sur­vey, and the per­cent­age of upgraders in­creased to 46 per­cent from 43 per­cent. While real de­mand con­tin­ued to dom­i­nate the mar­ket, spec­u­la­tors in­creased to 11 per­cent of to­tal buy­ers from 7 per­cent ear­lier. So, de­stock­ing of ex­ist­ing in­ven­tory likely re­mains the theme for the lo­cal mar­kets.

Our sur­vey re­vealed ini­tial signs of devel­op­ers’ fi­nanc­ing com­ing un­der stress again. This­may weigh on their ex­pan­sion­ary ap­petite go­ing for­ward. Fund­ing from sales rev­enue ap­pears to have be­come more im­por­tant.

In terms of gen­eral fi­nanc­ing con­di­tions, most re­spon­dents were slightly ner­vous or wor­ried about their cash po­si­tions in the near fu­ture, es­pe­cially if sales fail to im­prove.

De­fault cases con­tinue, and our sur­veyed devel­op­ers see a slight rise in the de­fault risk in the sec­ond of the year, although de­faults are not ex­pected to be preva­lent.

The devel­op­ers ex­pect pol­icy loos­en­ing at the lo­cal gov­ern­ment level, but a neu­tral stance at the cen­tral gov­ern­ment level. As to dif­fer­ent forms of pol­icy mea­sures, the devel­op­ers ex­pect the down­pay­ment ra­tio for buy­ers to be main­tained or low­ered; in­ter­est rates for mort­gage loan to stay flat; tax and sub­si­dies for buy­ers to be­come more fa­vor­able; and hukou (house­hold reg­is­tra­tion) re­stric­tions to be marginally eased dur­ing the rest of the year.

The sur­vey also shows signs of weak­en­ing hous­ing-mar­ket sen­ti­ment for the sec­ond half. And the de­vel­oper sen­ti­ment in­di­ca­tor shows a three-year cy­cle span since 2010. The lat­est cy­cle ap­pears to have reached a high in the first half of this year; the lower July sur­vey read­ing­may in­di­cate a po­ten­tial cool­ing down of the prop­erty mar­ket ahead.

We believe the cen­tral gov­ern­ment will base the hous­ing pol­icy this year on two key tar­gets: de­stock­ing and sup­port­ing real de­mand. Given that lower-tier ci­ties didn’t see a clear pick-up in their lo­cal mar­kets in the first half, the lo­cal hous­ing mar­ket pol­icy may stay ac­com­moda­tive and could fo­cus on con­tain­ing de­fault risk and fa­cil­i­tat­ing de­stock­ing. The au­thor is an econ­o­mist at Stan­dard Char­tered China.

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