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

The Peak (Hong Kong) - - Con­tents - STORY RYAN SWIFT

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.

ABOVE The Chief Ex­ec­u­tive of the HK­SAR Car­rie Lam Cheng Yuet-ngor signed the Frame­work Agree­ment on Deep­en­ing Guang­dong-hong Kong-ma­cao Co­op­er­a­tion in the De­vel­op­ment of the Bay Area with the Chair­man of the Na­tional De­vel­op­ment and Re­form Com­mis­sion He L

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