DIGGING INTO THE DATA ON CHINA
Robert Ciemniak, founder of Real Estate Foresight Ltd. in Hong Kong, has made it his business to gather and interpret real time data on China’s residential property market. Here, he gives his impressions of what’s happening in China, which numbers to watc
Robert Ciemniak, founder of Real Estate Foresight Ltd. in Hong Kong, gives his impressions of what’s happening in China, which numbers to watch out for, and where the opportunities lie
What do you regard as the key dynamics or indicators to watch when forecasting property prices in China's major cities? The single most important metric to watch is sales volumes growth. Our analysis shows sales volume growth tends to lead house price growth. But one must be wary of headline-only figures. For example, June national sales volumes growth was plus 14 per cent year-to-date, year-on-year. But the figure was minus 27 per cent for Tier 1 cities.
We analyse hundreds of indicators on a monthly and weekly basis, on sales volumes, prices, inventory, land sales, construction indicators as well as capital markets and macro factors. All metrics aside, understanding the policy and policy shifts remains critical, as the market continues to follow policy-driven cycles of easing and tightening, and policies reshape the structure of the markets. For example, recent rules in Guangzhou give equal access to schools for people who rent their property, as to homeowners. The growth of the rental market is an important and new trend, and Guangzhou will be followed by several other cities.
To what extent are housing markets in different cities diverging in terms of prices and market forces, and what is the connection between the different tiers? For example, is pricing in Shenzhen linked to the pricing in the rest of the Pearl River Delta? Sales and price performance are highly divergent across city tiers, cities and also districts of cities. Currently, the momentum is with the lower-tier cities, where prices and volumes are picking up. Cities in Pearl River Delta have shown very interesting spillover dynamics over the recent cycle. We first had a massive surge in prices in Shenzhen, followed with a lag by the nearby cities such as Huizhou, Dongguan and Zhongshan. Shenzhen peaked early 2016 in terms of year-on-year price growth, cooled rapidly and now prices have been declining slightly month-on-month. The nearby cities rose and peaked later, towards end of 2016, early 2017.
China seems to have embarked on a plan to create several “megacities”, most notably the Greater Bay Area and Jing-jin-ji, linked by infrastructure. How do you anticipate developments like this affecting prices and movement of people? I think the high-speed rail lines and metro lines connecting mega cities with smaller cities are the most important factors. It has contributed to the boom in lower tier cities, possibly with a twist. People will move to bigger cities, make money there, but get out priced in the market for property anyway. Yet, they can buy property back in their home town easily.
And let's not forget the basic factor – urbanisation is still under way. China's urbanization rate is around 56 per cent, but that figure could range from 30 to 90 per cent, depending on the region. The most important mega-development to watch is Xiong'an New Area. It is truly being built from scratch, whereas the other megacities have been on that path for years already.
In the summer of 2016, you seemed less concerned about overall debt levels among Chinese developers, at least when compared to other corporate sectors in the economy. Do you feel the same now? At an individual property developer level, we hear about more signs of financial pressure, especially for smaller local developers. But in the absence of an increase in longer-term interest rates, which seems to be the state of play for a while, and as long as demand for housing does not drop dramatically, I don't think there is any systemic issue, at least not yet.
A recent South China Morning Post article suggested that systemic risk is accumulating in the form of rapidly rising Chinese household debt, which is mostly used to buy a property. Given that so much of Chinese household wealth is tied to property, could China be setting itself up as the world's next financial crisis instigator? Yes, the risk is certainly building up. It goes up with any increase in leverage, as has been the case for housing, but the starting point was quite low. We are probably at the point now where, if this continues, it could be a real systemic problem. Of course, this is also why the government began a tightening policy about a year ago. Sales volumes have dropped dramatically in Tier 1 cities, and in lower tier cities, affordability is much better. Mortgage lending growth is now also cooling. A proper down-cycle is overdue (and there would be losses), but this doesn't, in my view, automatically lead to a systemic distress.
You have mentioned that the property development sector in China is very fragmented. Is this changing or evolving? Do you foresee consolidation in the years to come? It's a large, fragmented market for new home sales. There are over one billion square metres gross floor area in annual sales, and even the largest Chinese developer only sells around two to three per cent of that each year. Institutional investors focus on the top 10 or 20 listed developers in Hong Kong, while there are a few hundred listed developers across Shanghai, Shenzhen and Hong Kong, and around 90,000 “real estate development enterprises” in China, according to the National Bureau of Statistics.
There are drivers for consolidation. Limited land supply and rising land prices means it might be easier for larger players to buy smaller developers or their existing projects, rather than buy new land at auctions. As policy tightens, more developers will be financially stretched and could therefore wind up being bought by larger developers. This process would accelerate in any sharp downturn. We also have consolidation among state owned real estate developers, which is part of broader SOE reforms.
China's property developers have notably been making a big impact in Hong Kong – do you see this trend continuing, or might the appetite for Hong Kong property start to subside? I think overseas investments in the US and Europe will subside but Hong Kong could actually receive more interest as a result. How has the demand market changed in China for residential property? For example, you mentioned last year that “upgraders”, people who want newer, better properties, were becoming a bigger force in the market. What other changes and dynamics do you see happening now and in the near term future? Upgraders remain the key buyers, no change there. But there was a speculative rush in July-september last year, but this has decreased in cities with home purchase restrictions. In lower tier cities without such restrictions, there is more speculative activity, as such buyers will move on to new opportunities.
You have emphasised the importance of policy cycles driving residential markets in China, suggesting that prices follow on from policy shifts very tightly in all markets. Is this still true, or do you see changes coming? Where are we now in terms of policy and what do you foresee for overall prices in the next few years? We entered a clear policy tightening cycle around the end of September last year, with a wave of home purchase and other restrictions, with a visible slowdown in sales and price growth as a result. But we
haven't yet seen any interest rate hikes that would really affect the market, as mortgage lending has grown significantly and made everyone more sensitive to rate moves.
I think the cycles will continue over the next few years, with this cycle being more important given the need for market stability ahead of the Party Congress in a couple of months.
It seems that more land supply and changes to rental markets are meant to contribute to market cooling, without resorting to rate hikes. The significance of the property sector to the overall economy won't change in the next few years though, so I would expect the tightening-easing cycles to continue.
What sectors of the property market in China do you see as having the best near to mid-term future? I think the new home sales market is becoming a “product market”, i.e., the quality of the product – the design, layout, size, fit-out – matters much more and needs to appeal to discerning buyers. Regardless of the market dynamics, there will be constant opportunity to bring the right product to market. Separately, we see a lot of interest now in co-living and rental apartments, but these are still niche markets.
Among major cities – based on our quantitative analysis of price, volume, land and construction indicators at a city level – we see positive near-term momentum in Wenzhou, Ningbo, Shenyang, Beihai, Chongqing and Dalian.
At the upper (luxury) end of the market, what do you see as hotspots for future development, based on the data? As Tier-1 are well established on the luxury front, I believe the game is product innovation in Tier-1 and natural growth in Tier-2, and in the selective emerging lower tier cities.
What do you see as possible “black swan” events for the property market in China? A surprise series of interest rate hikes in the US, for whatever reason, which would be transmitted to China indirectly, and Hong Kong very directly, is an obvious pick.